Part 1 CHAPTER 1 THE PURPOSE AND USE OF FINANCIAL STATEMENTS LEARNING OBJECTIVES 1. 2. 3. 4.
Identify the uses and users of accounting information. Describe the primary forms of business organization. Explain the three main types of business activity. Describe the purpose and content of each of the financial statements.
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Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
Legend: The following abbreviations will appear throughout the solutions manual file.
LO
Learning objective
BT
Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation
Difficulty:
Level of difficulty S Simple M Moderate C Complex
Time:
Estimated time to prepare in minutes
AACSB
Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflec. Thinking Reflective Thinking
CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006
CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation
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ANSWERS TO QUESTIONS 1.
Accounting is the information system that identifies and records the economic events of an organization, and then communicates them to a wide variety of interested users.
LO 1 BT: K Difficulty: S TIME: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
2.
(a)
Internal users of accounting information work for the company and include finance directors, marketing managers, human resource personnel, production supervisors, and company officers.
(b)
Some external users may be individuals who are employees of the company but are not directly involved in managing the company. External users of accounting information generally do not work for the company. The primary external users are investors, lenders, and other creditors. Other external users include labour unions, customers, the Canada Revenue Agency (CRA), and securities commissions.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
3.
Internal users may want the following questions answered: Is there enough cash to purchase a new piece of equipment? What price should we sell our product for to cover costs and to maximize net income? How many employees can we afford to hire this year? Which product line is the most profitable? How much of a pay raise can the company afford to give me? External users may want the following questions answered: Is the company earning enough to give me my required return on investment? Will the company be able to repay its debts as the debts come due? Will the company stay in business long enough to service the products I buy from it?
LO 1 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
Primary users of accounting information include investors, lenders, and creditors. These external users need to make decisions concerning their ongoing business relationship with the company. They need to be able to assess the company’s performance and financial health because they intend to start, continue, or discontinue having transactions with the company. Other decision makers who have specific needs for certain financial information, such as the amount of taxes paid by the company, are not considered primary users.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5.
Decision makers rely on financial statement information and expect the accounting information to have been prepared ethically. Without the expectation of ethical behaviour, the information presented in the financial statements would have no credibility for the users of the accounting information. Without credibility, financial statement information would be useless to financial statement users.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics
6.
(a) Proprietorship: Proprietorships are easier to form (and dissolve) than other types of business organizations. They are not taxed as separate entities; rather, the proprietor pays personal income tax on the company’s net income. Depending on the circumstances, this may be an advantage or disadvantage. Disadvantages of a proprietorship include unlimited liability (proprietors are personally liable for all debts of the business) and difficulty in obtaining financing compared to other forms of organization. In addition, the life of the proprietorship is limited as it is dependent on the willingness and capability of the proprietor to continue operations. (b) Partnership: Partnerships are easier to form (and dissolve) than a corporation, although not as easy as a proprietorship. Similar to a proprietorship, partnerships are not taxed as separate entities. Instead, the partners pay personal income tax on their share of income. Depending on the circumstances this may be an advantage or disadvantage. Disadvantages of partnerships include unlimited liability (partners are jointly and severally liable for all debts of the business) and difficulty in obtaining financing compared to corporations. In addition, the life of a partnership can be limited depending on the terms of the partnership agreement and actions of the other partners.
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Financial Accounting, Seventh Canadian Edition
6. (continued) (c) Private corporation: Advantages of a private corporation include limited liability (shareholders not being personally liable for corporate debts), indefinite life, and transferability of ownership. In many cases, depending on the size of the corporation, a creditor such as a bank will ask for a personal guarantee which will void the limited liability advantage. In addition, transferability of ownership may be limited since shares are not publicly traded. Disadvantages of a private corporation include increased government regulations and paperwork. The fact that corporations are taxed as a separate legal entity may be an advantage or a disadvantage. Corporations often receive more favourable income tax treatment than other forms of business organizations. As mentioned above, depending on the size of the corporation, many of the advantages of the corporate form are not available to a small private corporation. (d) Public corporation: The advantages of a public corporation include limited liability, indefinite life, and transferability of ownership. These features make it easier for publicly traded corporations to raise financing compared to other forms of business organizations. Corporations often receive more favourable income tax treatment than other forms of business organizations. Disadvantages include increased government regulations and paperwork. In addition, because the shares of public companies are listed and traded on Canadian or other exchanges such as the Toronto Stock Exchange (TSX), these corporations are required to distribute their financial statements to investors, lenders, creditors and other interested parties, and the general public. This requirement involves greater costs to the corporation. LO 2 BT: C Difficulty: M TIME: 20 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax
7.
While both public and private corporations enjoy many of the same advantages and disadvantages, one key difference is that public corporations list their shares for sale to the public on Canadian or other stock exchanges. In contrast, while private corporations issue shares, they do not make them available to the general public or trade them on public stock exchanges. Private corporations may also not enjoy the advantages of limited liability and ease of transfer of ownership that public corporations generally experience because of their size and distribution of shares.
LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
(a)
Public corporations must apply International Financial Reporting Standards (IFRS). Private corporations can apply either IFRS or Accounting Standards for Private Enterprises (ASPE).
(b)
The information needs of users of public corporations and private corporations are different. Users of financial information of public corporations require more extensive disclosure. They may also be benefit from the enhanced comparability to global companies provided by international standards. Since private corporations tend to be smaller with easier access to company information, their users do not require as extensive reporting.
LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
9.
A private company that has plans to grow significantly in the near future, and that wishes to have access to large amounts of capital obtained from external investors will want to go public. In order to go public, the company would be required to have several years of past financial statements prepared using IFRS. In addition, some businesses choose to follow IFRS in order to be able to compare their performance with businesses in the same industry that are public and whose financial information is readily available.
LO 2 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
10.
The reporting entity concept means that economic activity of any business organization or economic entity is kept separate and distinct from the activities of the owner and all other economic entities. In the case of corporations such as The North West Company Inc., it also means that economic activities of related corporations that are owned or controlled by one corporation are consolidated. The results of these individual companies are also reported separately as separate economic entities.
LO 2 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
11.
(a) (b) (c)
(d) (e)
Solutions Manual .
Assets are what the company owns such as cash and equipment. A liability is an amount the company owes such as accounts payable and income tax payable. Shareholders’ equity represents the residual interest (assets less liabilities) of a company at a point in time and includes share capital and retained earnings, in addition to other possible components. Revenues are an increase in a company’s economic resources from operating activities such as the sale of a product. Expenses are the cost of assets that are consumed or services that are used in the process of generating revenues. Examples include cost of goods sold, rent expense, and salaries expense. 1-6
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12.
Operating activities are the activities that the organization undertakes to earn net income. They include the day-to-day activities that generate revenues and cause expenses to be incurred. In order to earn net income, a company must first purchase resources they need to operate. The purchase of these resources (assets) is considered to be an investing activity. Finally, the company must have sufficient funds to purchase assets and to operate. While some of the necessary cash will be generated from operations, often the company has to raise external funds by either issuing shares or borrowing money. Financing activities involve the activities undertaken by the company to raise cash externally.
LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
13.
(a)
Two examples of operating activities are revenue generated from providing auto repair services (an inflow of cash) and the expenses related to paying employee salaries (an outflow of cash).
(b)
Two examples of investing activities are the purchase of property, plant, and equipment, such as a building (an outflow of cash), and the sale of a long-term investment (an inflow of cash).
(c)
Two examples of financing activities for a corporation are borrowing money (debt), which is an inflow of cash, and declaring and paying dividends (equity), an outflow of cash
LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
14.
Local companies providing services and therefore generating service revenue would include doctors, dentists, architects, engineers, law practices, and accountants. The names of these businesses would likely include the name of the practitioners or groups providing these services. Local companies providing sales revenue would include farms that provide produce or milk products and the retail stores selling the local produce to customers.
LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
15.
A fiscal year is an accounting time period that is one year in length, but does not have to end on December 31. Corporations can select their fiscal year end based on when their operations are low or when inventory is low. Selecting a fiscal year end when operations are low provides more time for accounting staff to complete the year-end reporting requirements. If inventories are low, this simplifies the inventory count and minimizes the business disruption caused by counting the inventory.
LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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16.
Financial Accounting, Seventh Canadian Edition
The internal accounting records do use exact figures. However, for presentation purposes, it is unlikely that the use of rounded figures would change a decision made by the users of the financial statements. As well, presenting the information in this manner makes the statements easier to read and analyze thereby increasing their utility to the users. Rounding the numbers to the nearest million does not have a material impact on decision-making using the financial statements.
LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
17.
Assets = Liabilities + Shareholders’ Equity $793,795 = $436,183 + $357,612 (amounts are in thousands of dollars)
LO 4 BT: AP Difficulty: M TIME: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
18.
A statement of changes in equity explains the changes in the components of shareholders’ equity, such as share capital and retained earnings. Examples of items that increase the components are issue of shares (increases share capital) and net income (increases retained earnings). Examples of items that decrease the components are repurchases of shares (decreases share capital) and payment of dividends (decrease retained earnings).
LO 4 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
19.
(a)
The primary purpose of the statement of cash flows is to provide financial information about the cash receipts (inflows) and cash payments (outflows) of a company for a specific period of time.
(b)
The three categories of the statement of cash flows are operating activities, investing activities, and financing activities. These categories represent the three principal types of business activities.
LO 4 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
20.
The cash obtained from operating activities is not necessarily expected to be positive in the early years of a company’s life. If a business offers credit to its customers and needs to hold a significant amount of inventory to satisfy customer demands, a large amount of any cash obtained from selling goods will be tied up in accounts receivable and inventory. Creditors on the other hand will have little leniency on a new business when expecting to be paid. Consequently, the amount of cash from operating activities could very likely be negative. For investing activities, a negative cash outflow would also be expected as the business must invest in long-lived assets needed for operations.
LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
The statement of financial position is prepared as at a specific point in time because it shows what the business owns (its assets) and what it owes (its liabilities). These items are constantly changing. It is necessary to select one point in time at which to present them. The other statements (income statement, statement of changes in equity, and statement of cash flows) cover a period of time as they report activities and measure performance that takes place over time.
LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
22.
(a)
The income statement reports net income for the period. The net income figure from the income statement is shown on the statement of changes in equity as an addition to beginning retained earnings. If there is a loss it is deducted from beginning retained earnings.
(b)
The statement of changes in equity explains the change in the balances of the components of shareholders’ equity (for example, common shares and retained earnings) from one period to the next. The ending balances are reported in the shareholders’ equity section of the statement of financial position.
(c)
The statement of cash flows explains the change in the cash balance from one period to the next. The ending balance of cash reported in the statement of cash flows agrees with the ending cash balance reported in the current assets section on the statement of financial position.
LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
23.
(a)
Companies using IFRS must report an income statement, statement of changes in equity, statement of financial position, and statement of cash flows. In addition, companies using IFRS may also need to prepare a statement of comprehensive income.
(b)
Companies using ASPE must report an income statement, statement of retained earnings, balance sheet, and a statement of cash flows.
LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1-1 (a) Type of Evaluation
(b) Type of User
5 4 1 6 2 3
External Internal External Internal External External
Investor Marketing manager Creditor Chief financial officer Canada Revenue Agency Labour union
LO 1 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-2 (a) (b) (c) (d) (e)
1 4 3 2 4
Proprietorship Private corporation Public corporation Partnership Private corporation
LO 2 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-3 (a) (b) (c) (d) (e) (f) (g) (h) (i)
F O I F F F O I O
Inflow Inflow Inflow Outflow Inflow Outflow Outflow Outflow Outflow
Note to instructors: As we will learn later in Chapter 13, companies reporting under IFRS have a choice in classifying dividends paid as an operating or financing activity. We have chosen to classify dividends paid as financing activities in this textbook. LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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BRIEF EXERCISE 1-4
1. 2. 3. 4. 5. 6.
(a)
(b)
O F O O O I
NE + + -
LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-5 (a)
Total assets
= = =
Total liabilities + Shareholders’ equity $55,000 + $120,000 $175,000
(Liabilities + Shareholders’ equity = Assets)
(b)
Total assets
= = =
Total liabilities + Shareholders’ equity (share capital + retained earnings) $170,000 + ($100,000 + $90,000) $360,000
(Liabilities + Shareholders’ equity = Assets)
(c)
Total liabilities
= = =
Total assets – Shareholders’ equity (share capital + retained earnings) $150,000 – ($50,000 + $25,000) $75,000
(Assets – Shareholders’ equity = Liabilities)
(d)
Shareholders’ equity
= = =
Total assets – Total liabilities $500,000 – ($500,000 ÷ 2) $250,000
(Assets – Liabilities = Shareholders’ equity) LO 4 BT: AP Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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BRIEF EXERCISE 1-6 Beginning of Year: Assets = Liabilities + Shareholders’ equity Beginning of Year: $720,000 = $420,000 + Shareholders’ equity Beginning of Year: Shareholders’ equity = $300,000 (a)
($720,000 + $250,000) = ($420,000 – $80,000) + Shareholders’ equity Shareholders’ equity = $630,000
[(Assets ± Change in assets) – (Liabilities ± Change in liabilities) = Shareholders’ equity]
(b)
Assets = ($420,000 – $100,000) + ($300,000 + $90,000 + $125,000) Assets = $835,000
[(Liabilities ± Change in liabilities) + (Shareholders’ equity ± Change in shareholders’ equity) = Assets]
(c)
($720,000 – $90,000) = Liabilities + ($300,000 + $120,000) Liabilities = $210,000
[(Assets ± Change in assets) – (Shareholders’ equity ± Change in shareholders’ equity) = Liabilities] LO 4 BT: AP Difficulty: C TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-7 (a) (b) (c) (d) (e) (f) (g) (h)
IS SFP SCE SCF SFP SCF IS SCE
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BRIEF EXERCISE 1-8 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)
L A L L A A A SE L SE A
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BRIEF EXERCISE 1-9
(a) (b) (c) (d) (e) (f) (g) (h)
Share Capital
Retained Earnings
Total Shareholders' Equity
NE NE NE + NE NE NE
+ NE NE NE NE NE
+ NE + NE NE
Net income Repayment of bank loan Declared dividends Issue of common shares Cash Repurchase of common shares Net loss Issue of long-term debt
LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 1-10 (a)
Beginning balance Issue additional shares Net income Dividends declared Ending balance (b)
Beginning balance Issue additional shares Net loss Ending balance
(1)
(2)
Common Shares $100,000 50,000
Retained Earnings $475,000
$150,000
75,000 (15,000) $535,000
(1)
(2)
Common Shares $100,000 50,000
Retained Earnings $475,000 (75,000) $400,000
$150,000
(3) Total Shareholders' Equity $575,000 50,000 75,000 (15,000) $685,000 (3) Total Shareholders' Equity $575,000 50,000 (75,000) $550,000
(Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AN Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 1-1 (a)
Chief Financial Officer – Does Facebook generate enough cash to expand its operations and purchase other businesses? Human Resource Manager – What is Facebook’s annual salary expense?
(b)
Creditor – Does Facebook have enough cash available to make its monthly debt payments? Investor – How much did Facebook pay in dividends last year?
Other examples are also possible. LO 1 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 1-2 Proprietorship Partnership 1. 2. 3. 4. 5.
No personal liability Owner(s) pay(s) personal income tax on company income Generally easiest form of organization to raise capital Ownership indicated by shares Required to issue quarterly financial statements
Public Corporation
Private Corporation
F
F
T
T
T
T
F
F
F
F
T
F
F
F
T
T
F
F
T
F
6.
Owned by one person
T
F
F
F
7.
Limited life
T
T
F
F
T
F
F
F
F
F
T
F
F
F
F
T
8. 9.
Usually easiest form of organization to set up Required to use IFRS as its accounting standards
10. Shares are closely held
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
O I O F F F O O O F
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EXERCISE 1-4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
(a) O F I F I I O O I F F O
(b) + + + + + -
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-5 1. 2. 3. 4. 5. 6. 7. 8.
IS SFP, SCF SCF IS SCE, SFP SCE IS, SCE SFP
9. 10. 11. 12. 13. 14. 15.
SFP IS IS SCF SFP SCE, SFP SFP
LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 1-6 ; (a)
Assets – Liabilities = Shareholders’ equity 2017: $550,000 – $400,000 = $150,000 2018: $630,000 – $420,000 = $210,000
(Assets – Liabilities = Shareholders’ equity)
(b)
Change in shareholders’ equity $210,000 – $150,000 = $60,000 increase
(c)
1. Net income is $60,000 = the increase in shareholders’ equity 2. Net income is $70,000 = the increase in shareholders’ equity + dividends declared of $10,000 3. Net income is $30,000 = the increase in shareholders’ equity – common shares issued of $30,000 4. Net income is $50,000 = the increase in shareholders’ equity + dividends declared of $10,000 – common shares issued of $20,000
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EXERCISE 1-7 [1]
Total revenues – Net income = Total expenses $1,000,000 – $150,000 = $850,000
[2]
Common shares, end of year $100,000 = Beginning balance of common shares + Issue of shares of $100,000
[3]
$150,000 equal to Net income given above
[4]
Beginning balance of retained earnings plus net income less dividends declared = Ending balance of retained earnings. $0 + $150,000 – Dividends declared = $100,000 Dividends declared = $50,000
[5]
Beginning balance in shareholders' equity + Issue of shares + Net income – Dividends declared = Ending balance in shareholders’ equity $0 + $100,000 + $150,000 – $50,000 = $200,000
[6]
Total assets – Total liabilities = total Shareholders’ equity $1,050,000 – $850,000 = $200,000 or [5] above
[7]
Total revenues – Total expenses = Net income Total revenues – $250,000 = $50,000 Total revenues = $300,000
[8]
Beginning balance of common shares + Issue of shares = Common shares, end of year $0 + Issue of shares = $20,000 Issue of shares = $20,000
[9]
$50,000 equal to Net income given above
[10]
Common shares, end of year + Retained Earnings, end of year $20,000 + $40,000 = $60,000 Total shareholders’ equity, end of year
[11]
Total liabilities + Total shareholders’ equity = Total assets $150,000 + $60,000 (from [10]) = $210,000
[12]
$60,000 (from [10]) or $210,000 (from [11]) − $150,000 total liabilities = $60,000 total shareholders’ equity
LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 1-8 [1]
Total expenses + Net income = Total revenues $1,700,000 + $1,100,000 = $2,800,000
[2]
Common shares, end of year $200,000 = Beginning balance of common shares (nil) + Issue of shares of $200,000
[3]
$1,100,000 equal to Net income given above
[4]
Beginning balance of retained earnings plus net income less dividends declared + Beginning balance of common shares + Issue of shares = Ending balance in shareholders’ equity. $0 + $1,100,000 – $300,000 + $0 + $200,000 = $1,000,000 Ending balance in total shareholders’ equity = $1,000,000
[5]
Total liabilities + Total Shareholders’ equity = Total assets $1,600,000 + $1,000,000 or [4] above = $2,600,000
[6]
[4] above $1,000,000
[7]
Total revenues – Net income = Total expenses $3,200,000 – $1,500,000 = $1,700,000
[8]
Beginning balance of common shares + Issue of shares = Common shares, end of year $0 + Issue of shares = $500,000 Common shares, end of year $500,000
[9]
$1,500,000 equal to Net income given above
[10]
Beginning balance of retained earnings plus net income less dividends declared = Ending balance of retained earnings. $0 + $1,500,000 – Dividends declared = $1,200,000 Dividends declared = $300,000
[11]
Common shares, end of year + Retained Earnings, end of year $500,000 (from [8]) + $1,200,000 = $1,700,000 Total shareholders’ equity, end of year
[12]
Total assets – Total Shareholders’ equity = Total liabilities $3,100,000 – $1,700,000 = $1,400,000
LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
1-19
Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 1-9 ($ in thousands) (a) Assets – Liabilities = Shareholders’ equity 2015: $2,630,865 – $577,731 = $2,053,134 2014: $2,876,490 – $631,994 = $2,244,496 (b)
Assets = Liabilities + Shareholders’ equity 2015: $2,630,865 = $577,731 + $2,053,134 Assets = Liabilities + Shareholders’ equity 2014: $2,876,490 = $631,994 + $2,244,496
(c)
Change in shareholders’ equity $2,053,134 – $2,244,496= $191,362 decrease
(d)
Shareholders’ equity, Dec. 31, 2014 Add: Net income Deduct: Dividends declared Other shareholders’ equity items Shareholders’ equity, Dec. 31, 2015
$2,244,496 ? 44,668 188,274 $2,053,134
Solving for Net income: $2,053,134 + $188,274 + $44,668 − $2,244,496 = $41,580. (Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
1-20
Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 1-10 (a) L A L A A SE A (b)
Accounts payable Accounts receivable Bank loan payable Buildings Cash Common shares Equipment
L A A L SE A
Income tax payable Land Merchandise inventory Mortgage payable Retained earnings Supplies
Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts.
AVENTURA INC. Statement of Financial Position November 30, 2018 Assets Cash Accounts receivable Merchandise inventory Supplies Land Buildings Equipment Total assets
$ 20,000 19,500 18,000 700 44,000 100,000 30,000 $232,200
Liabilities and Shareholders’ Equity Liabilities Accounts payable Income tax payable Bank loan payable Mortgage payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
$ 26,200 6,000 34,000 97,500 163,700 20,000 48,500 68,500 $232,200
(Assets = Liabilities + Shareholders’ equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 1-11 (a) E E NR E R E E R (b)
Administrative expenses Cost of goods sold Dividends declared Finance expenses Finance income Income tax expense (recovery) Selling and distribution expenses Sales REITMANS (Canada) Limited Income Statement Year Ended January 30, 2016 (in thousands)
Revenues Sales Finance income Total revenues Expenses Selling and distribution expenses Cost of goods sold Administrative expenses Finance expenses Total expenses Loss before income tax Income tax recovery Net loss
$937,155 7,998 945,153 $497,854 410,035 46,950 16,443 971,282 (26,129) 1,426 $ (24,703)
[Revenues – Expenses = Net income or (loss)] LO 4 BT: AP Difficulty: M TIME20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 1-12 KON INC. Income Statement Year Ended December 31, 2018 Revenues Service revenue Expenses Salaries expense Rent expense Utilities expense Office expense Total expenses Income before income tax Income tax expense Net income
$61,000 $30,000 12,400 2,400 1,600 46,400 14,600 3,000 $11,600
[Revenues – Expenses = Net income or (loss)]
KON INC. Statement of Changes in Equity Year Ended December 31, 2018
Balance, January 1 Issued common shares Net income Dividends declared Balance, December 31
Common Shares $20,000 10,000
$30,000
Retained Earnings $58,000 11,600 (5,000) $64,600
Total Equity $78,000 10,000 11,600 (5,000) $94,600
(Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
1-23
Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 1-13 (a)
Camping revenue Expenses Operating expenses Income tax expense Net income
$283,000 $245,000 10,000
255,000 $ 28,000
[Revenues – Expenses = Net income or (loss)]
(b)
Balance, January 1 Issued common shares Net Income Dividends declared Balance, December 31
SEA SURF CAMPGROUND INC. Statement of Changes in Equity Year Ended December 31, 2018 Common Shares $30,000 15,000
$45,000
Retained Earnings $18,000 28,000 (12,000) $34,000
Total Equity $48,000 15,000 28,000 (12,000) $79,000
(Beginning equity ± Changes to equity = Ending equity) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts.
Solutions Manual .
1-24
Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 1-13 (CONTINUED) (b) (continued) SEA SURF CAMPGROUND INC. Statement of Financial Position December 31, 2018 Assets Cash Supplies Equipment Total assets
$
19,000 2,500 124,000 $145,500
Liabilities and Shareholders’ Equity Liabilities Accounts payable Bank loan payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
$ 16,500 50,000 66,500 45,000 34,000 79,000 $145,500
(Assets = Liabilities + Shareholders’ equity) LO 4 BT: AP Difficulty: M TIME: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
1-25
Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 1-14 1.
Yu Corporation is distributing nearly all of this year's net income as dividends. This suggests that Yu is not pursuing rapid growth. Companies that are pursuing opportunities for growth normally retain their net income and pay low, or no dividends.
2.
Surya Corporation is not generating sufficient cash from operating activities to fund its investing activities. The company is borrowing to finance its investing activities. This is common for companies in their early years of existence. It could also be in an expansion stage.
3.
Naguib Ltd. is financing its assets in a slightly higher proportion through equity than through debt. The company has $450,000 ($200,000 + $250,000) of total assets, which are funded 44.4% ($200,000 ÷ $450,000) by liabilities and 55.6% ($250,000 ÷ $450,000) by equity. Since equity does not have to be repaid and does not require interest payments, the company appears to be in a healthy financial position.
4.
Rijo Inc. does not have any liabilities and its assets are completely financed by equity. This places it in a very strong financial position since there are no outside claims on the company’s assets. This also means that the company is using its own funds to finance assets. While this reduces risk, it may also reduce return if borrowed funds can be employed to generate an internal return higher than the cost of borrowing.
LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
1-26
Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 1-1A (a)
1. The South Face Inc. is an external user of accounting information in assessing the creditworthiness of their customer. 2. An investor purchasing common shares of Orbite Online Inc. is an external user. 3. In deciding whether to extend a loan, Caisse d’Économie Base Montréal is an external user. 4. As an employee of Tech Toy Limited, the CFO is an internal user.
(b)
1. In deciding to extend credit, South Face would focus its attention on the statement of financial position of the new customer. The terms of credit they are extending require repayment in a short period of time. Funds to repay the credit would come from cash on hand and other current assets. The statement of financial position of the new customer will show if the company has enough current assets to meet its current obligations. 2. Since the investor intends to hold the shares for a long period of time (at least five years), s(he) should focus on the company’s income statement. The income statement reports the company’s past performance in terms of revenues, expenses, and net income. This is generally regarded as a good indicator of the company’s future performance. 3. The Caisse is interested in two things—the ability of the company to make interest payments on a monthly basis for the next three years and the ability to repay the principal amount at the end of the three years. In order to evaluate both of these factors, the focus should be on the statement of cash flows. This statement provides information on the cash the company generates from its operations on an ongoing basis. It also tells whether the company is currently borrowing or repaying debt. 4. The CFO should focus on the statement of cash flows as this statement clearly sets out the cash generated from operating activities and the amount the company has spent in the past on purchasing equipment and paying dividends.
Note to instructors: Other answers may be valid provided they are properly supported. LO 1 BT: C Difficulty: M TIME: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-2A (a)
(b)
1.
The professors should incorporate their business as a private corporation because of their concerns about legal liabilities. A corporation is the only form of business that provides limited liability. Since the professors do not need access to large amounts of investment capital, a private corporation provides the limited liability advantage the professors need.
2.
Joseph should run his bicycle rental shop as a proprietorship because this is the simplest and least costly form of business organization to establish and eventually dissolve. He is the only person involved in the business and is planning to operate for a limited time.
3.
The size of the businesses is not given, but Robert and Tom should likely form a public corporation, if possible, when they combine their operations. This is the best form of business for them to choose because they expect to raise funds in the coming year. A public corporation will enable them to raise significant amounts of funds for their manufacturing company. A corporation may also receive more favourable income tax treatment. If they are not large businesses, then Robert and Tom may choose to form a private corporation.
4.
A partnership would be the most likely form of business for Darcy, Ellen, and Meg to choose. It is simpler to form than a corporation and less costly.
5.
Hervé is most likely to select to operate his business as a private corporation. This will assist him with the liability of storing goods for others. He will also be able to raise funds to purchase equipment, rent space in airports, and hire employees. It is easier to raise funds through a private corporation rather than a proprietorship or partnership.
1. 2. 3. 4. 5.
ASPE ASPE IFRS ASPE ASPE
LO 2 BT: C Difficulty: M TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-3A (a) Operating
(b)
Investing
Financing
Indigo Books & Music
Sale of books
Purchase of store equipment
Issue of shares
High Liner Foods
Payment for fish
Purchase of production equipment
Borrowing money from a bank
Mountain Equipment Co-op
Payment for inventory
Purchase of store fixtures
Borrowing money from a bank
Ganong Bros.
Payment of salaries and benefits
Purchase of production equipment
Payment of dividends to shareholders
Royal Bank
Payment of interest on savings accounts
Purchase of office Issue of bonds equipment
Financing Issuing shares is common to all corporations. Issuing debt is common to most corporations. Borrowing from a bank is common to most companies. Payment of dividends is common to many, but not all, corporations. Issuing bonds is common to large public corporations. Investing Purchasing property, plant, and equipment is common to most companies—the types of assets would vary according to the nature of the business. Some types of companies require a larger investment in longlived assets. A new business or expanding business would be more apt to be acquiring assets. Operating The general activities identified above would be common to most corporations with the exception of the payment of interest on savings accounts. The source of the cash receipt (for example, from the sale of books) and cash payment (for example, for the payment for fish) would vary by the nature of the business.
LO 3 BT: C Difficulty: C TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-4A
Accounts payable Accounts receivable Bank indebtedness Bank loan payable Cash Common shares Equipment Goodwill Income tax expense Income tax payable Interest expense Office expense Prepaid insurance Rent expense Repair and maintenance expense Salaries payable Service revenue Supplies Vehicles
(a)
(b)
L A L L A SC A A E L E E A E E L R A A
SFP SFP SFP SFP SFP SFP, SCE SFP SFP IS SFP IS IS SFP IS IS SFP IS SFP SFP
LO 4 BT: K Difficulty: S TIME: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
1-30
Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-5A (a) and (b) (b)
Accounts payable Accounts receivable Bank loan payable Cash Common shares Equipment Income tax payable Intangible assets Interest payable Inventory Prepaid insurance Retained earnings Salaries payable Supplies Unearned revenue Vehicles Totals
$15,600 13,100 32,000 9,350 20,000 30,500 1,800 5,000 300 9,200 1,000 21,250 700 2,800 1,800 22,500
(a) L A L A SE A L A L A A SE L A L A
Assets
Liabilities $ 15,600
Shareholders’ Equity
$13,100 32,000 9,350 $ 20,000 30,500 1,800 5,000 300 9,200 1,000 21,250 700 2,800 22,500 $93,450
1,800 ______ $52,200
______ $41,250
Assets = Liabilities + SE $93,450 = $52,200 + $41,250 (c)
Beginning balance in Retained Earnings + Revenues – Expenses – Dividends declared = Ending balance in Retained Earnings $18,000 + $296,750 – $278,500 – $15,000 = $21,250
LO 4 BT: AP Difficulty: M TIME 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
1-31
Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-6A (a)
(All amounts are in millions of dollars)
Sears [1]
Total assets = Total liabilities + Total shareholders’ equity Total assets = $1,203.3 + $570.8 Total assets = $1,774.1
[2]
Total liabilities = Total assets – Total shareholders’ equity Total liabilities = $1,633.2 – $554.2 Total liabilities = $1,079.0
[3]
Shareholders’ equity, beginning of year + Total revenues – Total expenses – Other increases in shareholders’ equity = Shareholders’ equity, end of year $570.8 + $3,145.7 – [3] + $51.3 = $554.2 [3] Total expenses = $3,213.6
Canadian Tire [4]
Total liabilities = Total assets – Total shareholders’ equity Total liabilities = $14,553.2 – $5,630.8 Total liabilities = $8,922.4
[5]
Total assets = Total liabilities + Total shareholders’ equity Total assets = $9,198.1 + $5,789.7 [6] Total assets = $14,987.8
[6]
Shareholders’ equity, beginning of year – Repurchase of shares – Dividends declared + Total revenues – Total expenses + Other increases in shareholders’ equity = Shareholders’ equity, end of year $5,630.8 − $434.6 – $162.4 + $12,279.6 – $11,543.7 + $20.0 = $5,789.7
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-6A (CONTINUED) (b)
At the end of the most recent fiscal year, Sears has a higher proportion of debt financing and Canadian Tire has a higher proportion of equity financing. Canadian Tire financed 38.6% ($5,789.7 million ÷ $14,987.8 million) of its assets with equity and 61.4% of its assets with debt ($9,198.1 million ÷ $14,987.8 million). For the equivalent fiscal year end, 33.9% ($554.2 million ÷ $1,633.2 million) of Sears’s assets were financed by equity and 66.1% ($1,079.0 million ÷ $1,633.2 million) by debt. Sears is riskier because more of its assets are financed by debt.
(c)
Both retailers typically have low inventories at the end of December and at the end of January as a result of the Christmas sales, with little or no new inventory purchased during the month of January so no major differences in financial position at the end of December compared to January would be anticipated. As long as there were no significant economic events that affected one company more than the other in the intervening period (January), it is unlikely that the different year-end dates would affect the comparison in (b).
LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7A (a) ONE PLANET COSMETICS CORP. Income Statement Month Ended June 30, 2018 Revenues Service revenue Expenses Salaries expense Office expense Utilities expense Supplies expense Interest expense Total expenses Income before income tax Income tax expense Net income
$24,200 $5,700 1,500 1,500 2,100 800 11,600 12,600 700 $11,900
[Revenues – Expenses = Net income or (loss)]
ONE PLANET COSMETICS CORP. Statement of Changes in Equity Month Ended June 30, 2018
Balance, June 1 Issued common shares Net income Dividends declared Balance, June 30
Common Shares $ 0 36,000
$36,000
Retained Earnings $ 0 11,900 (1,000) $10,900
Total Equity $ 0 36,000 11,900 (1,000) $46,900
(Beginning equity ± Changes to equity = Ending equity)
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7A (CONTINUED) (a) (continued) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts. ONE PLANET COSMETICS CORP. Statement of Financial Position June 30, 2018 Assets Cash Accounts receivable Supplies Equipment Total assets
$ 15,000 9,000 1,200 52,000 $77,200 Liabilities and Shareholders’ Equity
Liabilities Accounts payable Bank loan payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
$ 7,300 23,000 30,300
0
36,000 10,900 46,900 $77,200
(Assets – Liabilities = Shareholders’ equity)
(b)
The financial statements must be prepared in the order of (1) income statement, (2) statement of changes in equity, and (3) statement of financial position. This is because each subsequent financial statement depends on information contained in the previous statement. The net income from the income statement flows to the retained earnings account on the statement of changes in equity. The shareholders’ equity totals in the statement of changes in equity (for example, for common shares and retained earnings) then flow to the shareholders’ equity section of the statement of financial position.
LO 4 BT: AP Difficulty: M TIME: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-8A (a) Cash dividends paid Cash paid to purchase equipment Cash payments for operating activities Cash receipts from operating activities Cash received from issue of long-term debt Cash received from issue of shares
$ 10,000 35,000 120,000 140,000 20,000 20,000
Activity financing investing operating operating financing financing
(b) MAISON CORPORATION Statement of Cash Flows Year Ended December 31, 2018 Operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities
$140,000 (120,000)
Investing activities Purchase of equipment Net cash used by investing activities
$(35,000)
Financing activities Issue of long-term debt Issue of shares Payment of dividends Net cash provided by financing activities
$ 20,000 20,000 (10,000)
$20,000
(35,000)
Net increase in cash Cash, January 1 Cash, December 31
30,000 15,000 12,000 $27,000
(Cash flows from operating, investing, and financing activities = Net change in cash)
(c)
The company is generating less cash from operating activities (+$20,000) than it is using for its investing activities (–$35,000) and the payment of dividends (–$10,000). The company, however, is making up for the deficiency by generating cash from financing activities. Cash from financing activities is not a renewable source of cash and usually entails future cash payments in the form of interest on debt, principal repayment, and dividend payments for shares.
LO 4 BT: AN Difficulty: M TIME: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-9A (a) [1]
Operating expenses = Service revenue – Income before income tax Operating expenses = $225,000 – $45,000 Operating expenses = $180,000
[2]
Net income = Income before income tax – Income tax expense Net income = $45,000 – $9,000 Net income = $36,000
[3]
Net income (from [2]) = $36,000
[4]
Ending retained earnings = Beginning retained earnings + Net income – Dividends declared Ending retained earnings = $0 + $36,000 (from [2]) – $15,000 Ending retained earnings = $21,000
[5]
Total issued common shares = $250,000
[6]
Net income = $36,000 (from [3])
[7]
Total equity = Beginning balance + Issued common shares + Net income – Dividends declared Total equity = $0 + $250,000 (from [5]) + $36,000 (from [6]) – $15,000 Total equity = $271,000
[8]
Land = Total assets (from [9]) – Cash – Accounts receivable – Building – Equipment Land = $964,000 – $22,000 – $34,000 – $390,000 – $218,000 Land = $300,000
[9]
Total assets = Total liabilities + Shareholders' equity Total Assets = $964,000
[10]
Accounts payable = Total liabilities – Bank loan payable Accounts payable = $693,000 – $600,000 Accounts payable = $93,000
[11]
Common shares = $250,000 (from the Statement of Changes in Equity)
[12]
Retained earnings = $21,000 (from [4])
[13]
Total shareholders' equity = Common shares + Retained earnings Total shareholders' equity = $250,000 (from [11]) + $21,000 (from [12]) = $271,000 or (from [7])
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-9A (CONTINUED) (b)
(1)
In preparing the financial statements, the first statement to be prepared is the income statement, followed by the statement of changes in equity, and then the statement of financial position. Note to instructors: While the statements must be prepared in this sequence, these statements can be presented in a variety of orders. Often the statement of financial position is presented first, as the most “permanent” statement.
(2)
The reason the statements must be prepared in the order indicated above is that each statement depends on information in the previously prepared statement. For example, the net income figure from the income statement is used in the statement of changes in equity to calculate the ending balance of retained earnings. The shareholders’ equity section of the statement of financial position is then completed using the ending balances of common shares and retained earnings as calculated in the statement of changes in equity.
LO 4 BT: AN Difficulty: C TIME: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-10A (a)
1. Remove the boat from the listing of assets since it does not belong to the corporation. Remove the boat loan payable from the listing of liabilities since this is a personal loan of Guy Gélinas. 2. Remove the $10,000 outstanding receivable from Guy’s brother. This is not a company receivable and should not be listed on the company’s statement of financial position. 3. Correct the Common Shares account to remove the extra amount that had been added to “balance”: Remove accounts receivable $10,000 Remove boat asset 24,000 Remove bank loan (40,000) Net adjustment to common shares $ 6,000 Provide separate totals for liabilities and shareholders’ equity as the two components that are financing the assets of the company.
(b)
GG CORPORATION Statement of Financial Position July 31, 2018 Assets
Cash Accounts receivable ($50,000 − $10,000) Inventory Total assets Liabilities and Shareholders’ Equity Liabilities Accounts payable Total liabilities Shareholders’ equity Common shares [$50,000 + $6,000 (from (3) above)] Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
$20,000 40,000 36,000 $96,000
$34,000 34,000
0
56,000 6,000 62,000 $96,000
(Assets – Liabilities = Shareholders’ equity)
(c)
As a private company, GG Corporation should also prepare an income statement, a statement of retained earnings, and a statement of cash flows.
LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 1
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-1B (a)
1. An investor purchasing common shares of Fight Fat Ltd. is an external user. 2. As a potential creditor, Comeau Ltée is an external user. 3. The chief financial officer is an internal user. 4. As a potential creditor, Drummond Bank is an external user.
(b)
1. In making an investment in common shares, the Ontario investor is becoming a partial owner (shareholder) of the company. In this case, the investment will be held for at least three years. The information that will be most relevant to him/her will be on the income statement. The income statement reports the past performance of the company in terms of its revenue, expenses, and net income. This is the best indicator of the company’s future potential. 2. In deciding to extend credit to a new customer, Comeau would focus its attention on the new customer's statement of financial position. The terms of credit they are extending require repayment in a short period of time. Funds to repay the credit would come from current assets. The statement of financial position of the new customer will show whether the company has enough current assets to meet its current obligations. 3. In order to determine whether the company is generating enough cash to increase the amount of dividends paid to investors, the CFO of Private Label needs information on the amount of cash generated and used in various activities of the business. The statement of cash flows is the most useful statement for this purpose. This statement presents the amount of cash at the beginning and end of the period as well as the details of the amount of cash generated by operating activities and the amount spent on expanding operations (investing activities).
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-1B (CONTINUED) 4. In deciding whether to extend a loan, Drummond Bank is interested in two things: the ability of the company to make its monthly interest payments for the next five years and the ability to repay the principal amount at the end of five years. In order to evaluate both of these factors the focus should be on the statement of cash flows. This statement provides information on the cash the company generates from its operating activities on an ongoing basis. This will be the most important factor in determining if the company will survive and be able to repay the principal and interest on the loan. Note to instructors: Other answers may be valid provided they are properly supported. LO 1 BT: C Difficulty: M TIME: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-2B (a)
1. Dawn will likely operate her vegetable stand as a proprietorship because she is planning on operating it for a short time period. A proprietorship is the simplest and least costly business organization to form and dissolve. 2. Joseph and Sabra should form a private corporation when they combine their operations. A private corporation will be easier and less expensive to form than a public corporation. It will also be an easier type of organization in which to raise funds than a proprietorship or partnership. A corporation may also receive more favourable income tax treatment. 3. The professors should incorporate their business as a private corporation because of their concerns about the legal liabilities. A corporation is the only form of business that provides limited liability to its owners. 4. Abdul would likely form a public corporation because he needs to raise funds to invest in inventories and property, plant, and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation than through a proprietorship or partnership. A public corporation will allow Abdul to raise larger amounts of funds by selling shares to the public. 5. A partnership would be the most likely form of business for Mary, Richard, and Jigme to choose. It is simpler to form than a corporation and less costly.
(b)
1. ASPE 2. ASPE 3. ASPE 4. IFRS 5. ASPE
LO 2 BT: C Difficulty: M TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-3B (a) Operating
Investing
Financing
WestJet Airlines
Payment for jet fuel
Purchase of airplanes
Issue of shares
University of Calgary Students’ Union
Payment of salaries and benefits Payment of research expenses Payment for facilities rentals
Purchase of office equipment Purchase of other companies Purchase of equipment
Borrowing money from a bank Issue of bonds
Receipt of revenue from sales of food from Sobeys
Purchase of real estate to build Sobeys’ stores
Repaying money to a bank
GlaxoSmithKline
Maple Leaf Sports & Entertainment
Empire Company
(b)
Payment of dividends to shareholders
Financing Issuing shares is common to all corporations. Borrowing from and repaying money to a bank is common to most companies. Payment of dividends is common to many, but not all, corporations. Issuing bonds is common to large corporations. Investing Purchasing property, plant, and equipment would be common to most companies—the types of assets would vary according to the type of business. Some types of businesses require a larger investment in longlived assets. A new business or expanding business would be more likely to engage in investing activities (for example, acquiring assets). The purchase of other companies would not be common to all companies. Operating The general activities identified above (sales and expenditures) would be common to most businesses, although the service or product might change.
LO 3 BT: C Difficulty: C TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-4B
Accounts payable Accounts receivable Bank loan payable Buildings Cash Common shares Cost of goods sold Equipment Income tax expense Income tax payable Intangible assets Interest expense Land Merchandise inventory Mortgage payable Office expense Prepaid insurance Retained earnings Salaries payable Sales Unearned revenue
(a)
(b)
L A L A A SE E A E L A E A A L E A SE L R L
SFP SFP SFP SFP SFP SFP, SCE IS SFP IS SFP SFP IS SFP SFP SFP IS SFP SFP, SCE SFP IS SFP
LO 4 BT: K Difficulty: S TIME: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-5B (a) and (b) (b)
Accounts payable Accounts receivable Bank loan payable Cash Common shares Equipment Income tax payable Interest payable Inventory Prepaid insurance Retained earnings Salaries payable Supplies Unearned revenue Totals
(a) L A L A SE A L L A A SE L A L
$23,100 6,950 25,000 17,750 20,000 66,200 1,900 500 21,300 950 39,850 3,050 3,750 3,500
Assets
Liabilities $23,100
Shareholders’ Equity
$ 6,950 25,000 17,750 $ 20,000 66,200 1,900 500 21,300 950 39,850 3,050 3,750 _______ $116,900
3,500 $57,050
_______ $59,850
Assets = Liabilities + Shareholders’ equity $116,900 = $57,050 + $59,850 (c)
Beginning balance in Retained Earnings + Revenues – Expenses – Dividends Declared = Ending balance in Retained Earnings $8,850 + $365,000 – $333,000 – $1,000 = $39,850
LO 4 BT: AP Difficulty: M TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-6B (a)
(All amounts are in U.S. millions of dollars) Restaurant Brands [1]
Total liabilities = Total assets – Total shareholders’ equity Total liabilities = $21,343.0 – $7,636.8 Total liabilities = $13,706.2
[2]
Total shareholders' equity = Total assets – Total liabilities Total shareholders' equity = $18,408.5 – $12,198.4 Total shareholders' equity = $6,210.1
[3]
Shareholders’ equity, beginning of year – Repurchase of shares – Dividends declared + Total revenues – Total expenses – Other decreases in shareholders’ equity = Shareholders’ equity, end of year $7,636.8 − $293.7 − $[3] + $4,052.2 – $3,540.5 − $1,167.8 = $6,210.1 [3] Dividends declared = $476.9
Starbucks [4]
Total assets = Total liabilities + Total shareholders’ equity Total assets = $5,479.2 + $5,273.7 Total assets = $10,752.9
[5]
Total assets = Total liabilities + Total shareholders’ equity Total assets = $6,626.3 + $5,038.4 (from [6]) Total assets = $11,664.7
[6]
Shareholders’ equity, beginning of year + Issuance of shares – Dividends declared + Total revenues – Total expenses – Other increases in shareholders’ equity = Shareholders’ equity, end of year $5,273.7 + $23.5 − $1,016.2 + $19,162.7 – $18,616.6 + $211.3 = $5,038.4
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-6B (CONTINUED) (b)
At the end of the most recent fiscal year, Restaurant Brands has a higher proportion of debt financing and Starbucks has a higher proportion of equity financing. Starbucks financed 43.2% (U.S. $5,038.4 million ÷ U.S. $11,664.7 million) of its assets with equity and 56.8% of its assets with debt (U.S. $6,626.3 million ÷ U.S. $11,664.7 million). For the same period, 33.7% ($6,210.1 million ÷ $18,408.5 million) of Restaurant Brands’ assets were financed by equity and 66.3% ($12,198.4 million ÷ $18,408.5 million) by debt. Restaurant Brands is riskier because more of its assets are financed by debt.
(c)
As long as there are no unusual transactions or economic events that affect one company differently than another during the intervening period of time (October through December), or at each company’s year-end date, the differing year ends should not have a significant impact on the assessment of the financial position and performance for the two companies.
LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7B (a)
AERO FLYING SCHOOL LTD. Income Statement Month Ended May 31, 2018
Revenues Service revenue Expenses Fuel expense Rent expense Office expense Salaries expense Repair and maintenance expense Interest expense Income before income tax Income tax expense Net income
$215,300 $85,400 12,100 12,700 36,600 40,900 12,500
200,200 15,100 2,800 $ 12,300
[Revenues – Expenses = Net income or (loss)]
AERO FLYING SCHOOL LTD. Statement of Changes in Equity Month Ended May 31, 2018
Balance, May 1 Issued common shares Net income Dividends declared Balance, May 31
Common Shares $ 0 180,000
$180,000
Retained Earnings $ 0 12,300 (2,700) $9,600
Total Equity $ 0 180,000 12,300 (2,700) $189,600
(Beginning equity ± Changes to equity = Ending equity)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7B (CONTINUED) (a) (continued) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders’ equity classifications as they have not yet learned how to classify/order accounts. AERO FLYING SCHOOL LTD. Statement of Financial Position May 31, 2018 Assets Cash Accounts receivable Supplies Equipment Total assets
$ 26,900 22,600 15,000 372,500 $ 437,000 Liabilities and Shareholders’ Equity
Liabilities Accounts payable Bank loan payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
$
6,400 241,000 247,400
180,000 9,600 189,600 $437,000
(Assets – Liabilities = Shareholders’ equity)
(b)
The financial statements must be prepared in the order of (1) income statement, (2) statement of changes in equity, and (3) statement of financial position. This is because each subsequent financial statement depends on information contained in the previous statement. The net income from the income statement flows to the retained earnings in the statement of changes in equity. The shareholders’ equity totals (for example, for common shares and retained earnings) in the statement of changes in equity then flow to the shareholders’ equity section of the statement of financial position.
LO 4 BT: AP Difficulty: M TIME: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-8B (a) Cash payments for operating activities Cash paid for equipment Repayment of long-term debt Cash dividends paid Cash receipts from operating activities
$109,000 40,000 15,000 13,000 158,000
Activity operating investing financing financing operating
(b) FURLOTTE CORPORATION Statement of Cash Flows Year Ended June 30, 2018 Operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities
$158,000 (109,000)
Investing activities Cash paid to purchase equipment Net cash used by investing activities
$(40,000)
Financing activities Repayment of long-term debt Cash dividends paid Net cash used by financing activities
$(15,000) (13,000)
$49,000
(40,000)
Decrease in cash Cash, July 1, 2017 Cash, June 30, 2018
(28,000) (19,000) 40,000 $21,000
(Cash flows from operating, investing, and financing activities = Net change in cash)
(c)
The company is not generating sufficient cash from its operating activities ($49,000) to pay for the total of its investing activities ($40,000) and dividend payments ($13,000). If the company expects to continue to use cash for investing activities and dividend payments in future years, it will either have to generate more cash from its operating activities or from its financing activities (for example, borrow money) as its ending cash balance will not sustain this cash outflow on its own.
LO 4 BT: AN Difficulty: M TIME: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-9B (a)
[1]
Operating expenses = Service revenue – Income before income tax Operating expenses = $325,000 – $116,000 Operating expenses = $209,000
[2]
Net income = Income before income tax – Income tax expense Net income = $116,000 – $23,000 Net income = $93,000
[3]
Net income = $93,000 (same as [2])
[4]
Dividends declared = Beginning retained earnings + Net income – Ending retained earnings Dividends declared = $440,000 + $93,000 – $521,000 Dividends declared = $12,000
[5]
Beginning total equity = Beginning common shares + Beginning retained earnings Beginning total equity = $250,000 + $440,000 Beginning total equity = $690,000
[6]
Total common shares issued = $60,000
[7]
Net income = $93,000 (same as [3])
[8]
Dividends declared = $12,000 (same as [4])
[9]
Ending total equity = Ending common shares + Ending retained earnings Ending total equity = $310,000 + $521,000 Ending total equity = $831,000
[10]
Cash = Total assets – (Accounts receivable + Land + Buildings + Equipment) Cash = $1,351,000 (from [11]) – ($34,000 + $310,000 + $616,000 + $364,000) Cash = $27,000
[11]
Total assets = Total liabilities and shareholders’ equity Total assets = $1,351,000
[12]
Common shares = $310,000 (as per statement of changes in equity)
[13]
Retained earnings = $521,000 (as per statement of changes in equity)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-9B (CONTINUED) (b)
(1)
In preparing the financial statements, the first statement to be prepared is the income statement, followed by the statement of changes in equity, and then the statement of financial position. While the statements must be prepared in this sequence, these statements can be presented in a variety of orders. Often the statement of financial position is presented first, as the most “permanent” statement.
(2)
The reason the statements must be prepared in the order indicated above is that each statement depends on information in the previously prepared statement. For example, the net income figure in the income statement is used in the statement of changes in equity to calculate the ending balance of retained earnings. The shareholders’ equity section of the statement of financial position is then completed using the ending balances of the shareholders’ equity components (such as common shares and retained earnings) as calculated in the statement of changes in equity.
LO 4 BT: AN Difficulty: C TIME: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 1-10B (a) 1.
Remove accounts receivable from the revenue section of the income statement since it is a current asset and does not belong on the income statement.
2.
Remove the $3,000 of service revenue that has not yet occurred.
3.
Remove the $12,000 rent expense. This is not an actual transaction and cannot be listed on the company’s income statement.
4.
Remove the $4,000 vacation expense. This is not a business expense but rather a personal expense of the business owner.
5.
Deduct expenses from revenues rather than adding them.
(b)
INDEPENDENT BOOK SHOP LTD. Income Statement Year Ended March 31, 2018
Revenues Service revenue ($41,000 – $3,000) Expenses Office expense Income before income tax Income tax expense Net income
$38,000 5,000 33,000 5,000 $28,000
[Revenues – Expenses = Net income or (loss)]
(c)
As a private company, Independent Book Shop should also prepare a statement of financial position, a statement of retained earnings, and a statement of cash flows.
LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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CT1-1 (a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
North West presents the following five financial statements: Statement of Earnings (which we call income statement in the chapter), Statement of Comprehensive Income, Balance Sheet (which we call statement of financial position), Statement of Changes in Shareholders’ Equity (which we call statement of changes in equity), and Statement of Cash Flows. All of the above financial statements, except the Statement of Comprehensive Income, were discussed in this chapter.
(b)
As demonstrated in the table below, North West’ sales and net income increased in fiscal 2016. ($ in thousands) Sales Net income (net earnings)
2016 $1,796,035 69,779
2015
Change
$1,624,400 62,883
$171,635 6,896
Net income is affected by revenue and expenses incurred by a company during the year. An increase in sales does not always translate into an increase in net income. For North West, both revenue and net income increased.
(c) ($ in thousands)
(1) January 31, 2016
Total assets Total liabilities Total shareholders’ equity
$793,795 436,183 357,612
(2) January 31, 2015 $724,299 395,016 329,283
(Assets = Liabilities + Shareholders’ equity)
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CT1-1 (CONTINUED) (d)
($ in thousands)
January 31, 2016
Share capital Retained earnings
$167,910 156,664
January 31, 2015
$167,460 140,527
Yes, the above balances taken from the statement of changes in equity agree to the same amounts reported in the shareholders’ equity section of the balance sheet. Note that these do not comprise all of North West’s’ shareholders’ equity. Other shareholders’ equity items make up the remainder of the total shareholders’ equity balances reported on both statements as shown below. ($ in thousands) Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Total shareholders’ equity
(e)
($ in thousands) Cash
January 31, 2016
January 31, 2015
$167,910 2,620 156,664
$167,460 2,831 140,527
30,418 $357,612
18,465 $329,283
January 31, 2016 $37,243
January 31, 2015 $29,129
This information can be obtained on the balance sheet (statement of financial position) or on the statement of cash flows. LO 4 BT: AN Difficulty: M TIME: 40 min. AACSB: Communication and Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance
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CT1-2 (a) and (b)
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
[North West ($ in thousands)]
1. Assets Liabilities Shareholders’ equity
2016 $793,795 436,183 357,612
2015 $724,299 395,016 329,283
% change 9.6% 10.4% 8.6%
2016 $1,796,035 69,779
2015 $1,624,400 62,883
% change 10.6% 11.0%
1. Assets Liabilities Shareholders’ equity
2016 $7,960.6 5,230.9 2,729.7
2015 $10,261.0 5,282.6 4,978.4
% change (22.4)% (1.0)% (45.2)%
2. Sales Net income (loss)
2016 $24,618.8 (2,119.2)
2015 $23,928.8 366.7
% change 2.9% *
2. Sales Net income Sobeys ($ in millions)
*not meaningful (c)
North West experienced growth in assets, liabilities, and shareholders’ equity. However, its liabilities grew at a faster pace than its assets which is not always a positive sign. From a profitability standpoint, the 10.6% increase in sales caused an increase in net income of 11% which demonstrates a strong management of expenses. Due to the nature of the goodwill impairment loss of just under $3 billion in 2016, both assets and equity decreased substantially for Sobeys. In addition, the impairment did not affect increases in sales. The size of the impairment loss removes the opportunity to assess profitability.
(d)
In 2016, Sobey’s fiscal year (May 3, 2015 through May 7, 2016) covers the majority of the same period as North West’s fiscal year (Feb. 1, 2015 through January 31, 2016). The same is true for their previous fiscal years. Consequently, unless there was a significant economic impact that affected the stores in the non-overlapping period of four months (February through May), I would have no concerns about the comparisons made in (c) as they both cover a single fiscal year.
LO 4 BT: AN Difficulty: M TIME: 40 min. AACSB: Communication and Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance Solutions Manual .
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CT1-3 (a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
Both North West and Sobeys declared and paid dividends in fiscal year 2016 as revealed in their respective statement of changes in equity, as follows: North West Sobeys (in thousands) (in millions) Dividends
(b)
$58,210
$130.3
Both North West and Sobeys generated positive cash flows from their operations as revealed in their respective statement of cash flows, as follows: North West Sobeys (in thousands) (in millions) Cash from operating activities
(A)
$132,987
$837.7
Cash used in investing activities
(B)
75,813
631.4
175%
133%
A divided by B
Both companies are reinvesting cash from operations back into the business. (c)
Only Sobeys repaid long-term debt during the 2016 fiscal year as revealed in their respective statement of cash flows, as follows: North West Sobeys (in thousands) (in millions) Repayment of long-term debt
nil
$594.4
Although it appears as if Sobeys paid off debt, this is really not the case since new debt of $582.7 was obtained. Consequently, the two companies have similar changes to long-term debt. (d)
Only North West issued common shares during the 2016 fiscal year as revealed in their respective statement of cash flows, as follows: North West Sobeys (in thousands) (in millions) Issuance of common shares
$115
nil
LO 4 BT: AN Difficulty: M TIME: 30 min. AACSB: Communication and Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance
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CT1-4 (a)
Financial Accounting, Seventh Canadian Edition
PROFESSIONAL JUDGEMENT CASE
Both public and private companies are separate legal entities owned by shareholders. One of the key differences between the two types of companies is the availability of the shares. Shares of public companies are traded on organized stock exchanges and are available to the general public. In contrast, shares of a private company are not made available to the general public nor are they traded on a public stock exchange. Another difference is access to capital. Since public companies are traded on organized stock exchanges, they generally have more access to capital than private companies. Private companies tend to rely upon bank financing for capital. Public and private companies also differ in terms of the amount of information they disclose publicly. Public companies are required to file financial statements with the regulators of the stock exchange. This makes their statements widely available. In contrast, private companies do not have any requirement to make their financial statements publicly available.
(b)
The key users of public company financial statements are shareholders, lenders and other creditors, regulators, analysts, and the general public. In contrast, the key users of private company financial statements are generally lenders and other creditors as well as private shareholders.
(c)
The key difference between the users of public and private financial statements is the different areas of emphasis of the users’ objectives and needs when reviewing the financial statements. Users of public company financial statements can represent a wide range with varying levels of understanding about the company and its operations. They tend to be a broad group of users who benefit from detailed disclosure that will help them make the appropriate financial decision to invest or to lend, etc. On the other hand, users of private company financial statements tend to be a small group, who usually have a high degree of understanding of the company and its operations. They consist mostly of lenders and other creditors and a small group of shareholders. These users tend to place a greater emphasis on liquidity, solvency, and short-term cash flow planning.
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Financial Accounting, Seventh Canadian Edition
CT1-4 (CONTINUED) (d)
One of the main reasons that Canada adopted IFRS is that these global set of standards will be beneficial to investors, lenders, other creditors, and other financial statement users by increasing the comparability and quality of financial statements. In other words, users will be able to make an “apples to apples” comparison. If Canadian public companies had a choice of which GAAP to use, then it would entirely defeat the purpose of increasing comparability among public companies.
(e)
Since most private companies in Canada are small to medium-sized businesses, the Canadian Accounting Standards Board (AcSB) decided that IFRS, with its extensive disclosure reporting requirements and sophisticated reporting, was not appropriate for most of these companies. However, since private companies can represent a wide range of companies – from large multinationals to small local restaurants, the AcSB decided it was best if private companies have a choice of which standard to adopt. A company’s choice of which GAAP to adopt is generally driven by users’ objectives and needs.
LO 1, 2 BT: C Difficulty: M TIME: 30 min. AACSB: Communication CPA: cpa-t001, cpa-e003 CM: Reporting and Comm.
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CT1-5
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS. (a) Divide revenue by the hourly rate charged to clients: IMS: $1,020,000 ÷ $17 per hour = 60,000 hours PCS: $900,000 ÷ $30 per hour = 30,000 hours (b) Knowing the hours worked from the above, we can derive the hourly salary by dividing total salary expense for each company by the hours worked as follows: IMS: $600,000 ÷ 60,000 hours = $10 per hour PCS: $450,000 ÷ 30,000 hours = $15 per hour (c) IMS uses larger facilities because its rent expense is higher. This makes sense because they have larger types of cleaning equipment that will need to be stored. Furthermore, the company has a larger staff given the size of its operations and may need more office space. (d) PCS has higher other operating expenses because that company owns and operates vehicles. (e) Given that both companies pay interest at the same rate, IMS has the larger bank loan because its interest expense higher. (f) The most significant factor that makes PCS more profitable is the fact that this company charges its clients an hourly rate that is double the hourly wage rate paid to its employees. IMS is not able to charge its clients at double the wage rate. LO 4 BT: AN Difficulty: M TIME20 min. AACSB: Communication and Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance
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CT1-6
ETHICS CASE
(a)
The stakeholders in this situation are the new CEO and CFO, and the creditors and investors who rely on the financial statements to make business decisions.
(b)
The CEO and CFO should not sign the certification until they have taken steps to assure themselves that the most recent reports accurately and completely reflect the activities of the business. However, as the current management of the company, they cannot refuse to sign the certification just because they are new. They are the management team now and must assume the responsibilities that go with these positions.
(c)
The CEO and CFO have no alternative other than to take the steps necessary to assure themselves of the accuracy and completeness of the financial information, and, if accurate, sign the certification. If the information is not accurate or complete, they need to make the required corrections to the financial information. The company may need to delay issuing its financial statements.
LO 1 BT: E Difficulty: M TIME15 min. AACSB: Communication and Ethics CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics
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CT1-7 (a)
Financial Accounting, Seventh Canadian Edition
SERIAL CASE
Compu-Tech Consulting is a proprietorship. A proprietorship has the advantage of lower administrative costs than a corporation—fewer regulations and procedures to adhere to. Emily may also have more flexibility in working for herself (or less depending on the demands of the business). In addition, as a separate proprietorship, all of the income of the business belongs to Emily. However, the disadvantage of a proprietorship is that Emily has personal and unlimited liability for the debts of the business. She may also have difficulty in raising capital to grow the business. Anthony Business Company Ltd. (ABC) is a private corporation. It has the advantage of limited liability for the shareholders’ investments in the business compared to a proprietorship. However, this advantage may be negated by a demand from creditors (such as the bank) for a personal guarantee by the shareholders. Another disadvantage is that if net income is distributed by declaring dividends, it must be shared with all shareholders in proportion to their shareholdings. More regulations and paperwork are required for a corporation compared to that of a proprietorship; however, more opportunities exist to share the administrative burdens and to grow the business.
(b)
Given its current size, Compu-Tech Consulting likely has no requirements to produce financial statements used by external creditors. It could choose to follow Accounting Standards for Private Enterprises (ASPE) if it was required to produce financial statements. Anthony Business Company Ltd. would most likely use Accounting Standards for Private Enterprises (ASPE) ) but could also, if it wished, choose to use International Financial Reporting Standards (IFRS). We will assume the former for the purpose of this case.
. (c)
Emily will need information on the revenues and cost of the services performed and the cost of products and accessories sold so she can determine if new contracts are profitable. She will need this information more often initially (for example, on a weekly basis) so she can monitor the results of the contracts and their impact on the operations of the company. She will also need forecasts of future services and product and accessory sales to plan the work, estimate staffing and other costs, and determine delivery schedules. Emily would also find financial statements useful to better understand ABC’s business and identify financial issues as early as possible. Monthly financial statements would be best as the more timely the information is, the more useful it is for managing the business.
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CT1-7 (CONTINUED) (d)
The users of ABC’s accounting information include the existing shareholders (Emily’s parents), potential shareholders such as Emily, creditors such as the bank, and taxing authorities such as the CRA. Emily’s parents are internal users and they need accounting information to plan, organize, and run the company and determine if they can obtain the financing to meet the increased demand. Emily needs accounting information to determine if her parents’ business is a sound investment for her and what her responsibilities as administrator would be. Creditors and taxing authorities would be considered external users. The bank and the CRA require financial statements—income statement, statement of retained earnings (since it is assumed that ABC follows ASPE; however, if it follows IFRS then it would be required to prepare a statement of changes in equity), statement of financial position, statement of cash flows, in addition to accompanying notes to the financial statements—to assess the financial health of the company.
(e)
The following are examples of activities that ABC is likely to be engaged in: Operating activities include cash collection from revenue generated from the sale of products and accessories and from providing business services. Cash payments would be made for products, accessories,supplies, salaries, utilities, and interest on bank loans. Investing activities include the purchase of equipment or the sale of used equipment no longer in use. Financing activities include borrowing money from the bank (debt) and paying dividends to shareholders (equity).
LO 1,2,3,4 BT: C Difficulty: M TIME: 50 min. AACSB: Comm. CPA: cpa-t001 CM: Reporting
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CHAPTER 2 A FURTHER LOOK AT FINANCIAL STATEMENTS LEARNING OBJECTIVES 1. Identify the sections of a classified statement of financial position. 2. Identify and calculate ratios for analyzing a company’s liquidity, solvency, and profitability. 3. Describe the framework for the preparation and presentation of financial statements.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO
BT Item LO
BT Item LO BT Item LO Questions
BT Item LO
BT
1.
1
K
7.
1
C
13.
2
C
19.
3
C
25.
3
C
2.
1
C
8.
1
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14.
2
K
20.
3
C
26.
3
C
3.
1
C
9.
2
C
15.
2
C
21.
3
C
27.
3
K
4.
1
K
10.
2
C
16.
2
C
22.
3
C
28.
3
C
5.
1
C
11.
2
C
17.
2
K
23.
3
C
29.
3
C
6.
1
C
12.
2
C
18.
2
C
24.
3
C
Brief Exercises 1.
1
K
3.
1
AP
5.
2
AP
7.
2
AN
9.
3
C
2.
1
K
4.
1
AP
6.
2
AN
8.
3
K
10.
3
C
Exercises 1.
1
K
3.
1
AP
5.
1
AP
7.
2
AN
9.
3
K
2.
1
AP
4.
1
AP
6.
2
E
8.
2
AN
10.
3
C
Problems: Set A and B 1.
1
K
3.
1
AP
5.
2
AN
7.
2
AN
9.
3
E
2.
1
AP
4.
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AP
6.
2
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8.
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10.
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Cases 1.
1
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3.
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Legend: The following abbreviations will appear throughout the solutions manual file. LO
Learning objective
BT
Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation
Difficulty:
Level of difficulty S Simple M Moderate C Complex
Time:
Estimated time to complete in minutes
AACSB
Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflec. Thinking Reflective Thinking
CPA CM
CPA Canada Competency Map Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation
cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006
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ANSWERS TO QUESTIONS 1.
(a)
Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer.
(b)
Examples of current assets include cash, accounts receivable, inventory, and supplies. Current assets are listed in order of liquidity in the current asset section of the statement of financial position.
LO 1 BT: K Difficulty: S Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
2.
The term operating cycle stands for the average time it takes to go from cash to cash in producing revenue. In a merchandising business, this means the time it takes to purchase inventory on account, pay cash to suppliers, sell the inventory on account, and then collect cash from customers. In a service business, it stands for the time it takes to pay employees, provide services on account, and then collect the cash from customers.
LO 1 BT: C Difficulty: M Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
3.
(a)
Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer. Noncurrent assets are assets that are not expected to be converted into cash, sold, or used up by the business within one year of the financial statement date or its operating cycle. In other words, noncurrent assets are all assets that are not classified as current assets.
(b)
Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer. Current liabilities are obligations that are to be paid or settled within one year of the company’s financial statement date or its operating cycle, whichever is longer. Ideally, current assets will exceed current liabilities for a company. Showing items as current in nature matters because doing so assists the user of the financial statements to assess the business’s liquidity.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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4.
Financial Accounting, Seventh Canadian Edition
(a)
Current liabilities are obligations that are to be paid or settled within one year of the company’s financial statement date or its operating cycle, whichever is longer.
(b)
Examples of current liabilities include bank indebtedness, accounts payable, accrued liabilities, and current maturities of long-term debt. Current liabilities are listed in the order in which they are expected to be paid in the current liability section of the statement of financial position.
LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5.
(a)
The major differences between current liabilities and non-current liabilities are:
Difference Source of payment
Current Liabilities Existing current assets or other current liabilities
Non-Current Liabilities Other than existing current assets or other current liabilities
Time of expected payment
Within one year
Beyond one year
Nature of items
Debts pertaining to the operating cycle and other short-term debts
Mortgages, notes, loans, bonds, and other noncurrent liabilities
(b)
Some liabilities, such as bank loans, appear on the statement of financial position with a current and non-current portion. Included in the balance of the bank loan payable are principal payments that will be due in the next year. That amount must be shown as a current liability as at the company’s financial statement date. The remaining principal balance is classified as a non-current liability.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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6.
Financial Accounting, Seventh Canadian Edition
(a)
Contra accounts are accounts that offset the account to which they relate. Contra accounts serve to keep track of and disclose the amount of the reduction to the balance of the related account and arrive at its carrying amount. An example is accumulated depreciation, which is offset against the related asset account to arrive at the asset’s carrying amount.
(b)
In the case of property, plant, and equipment, users find it useful to know the historical cost of assets as well as the cumulative amount of depreciation (contra account called accumulated depreciation) that has been recorded to date on them. The difference between cost and accumulated depreciation is referred to as the carrying amount, also commonly known as net book value or just simply book value.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
7.
Current assets and liabilities are listed in the statement of financial position in the order in which they are expected to be converted into cash, sold or used up in the case of assets and paid or settled, in the case of liabilities; that is, in their order of liquidity. Liquidity is enhanced when an asset can be converted to cash more quickly than another asset. In the case of liabilities, some liabilities will be paid more quickly than others and so they would be deemed to be more liquid. Other assets are listed in the order of permanency. Long-term assets, such as property, plant, and equipment, are usually presented in order of permanence, with the most permanent (land) being presented first.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
8.
(a)
The two components of shareholders' equity and the purpose of each are: (1) Share capital is used to record investments of assets, i.e. cash, in the business by the owners (shareholders). If there is only one class of shares, it is known as common shares. (2) Retained earnings is used to record accumulated profit, net of any losses and dividends declared, retained in the company.
(b)
Under ASPE, the ending balances of share capital and retained earnings would appear on the statement of financial position and the ending balance of retained earnings would also appear on the statement of retained earnings. Under IFRS, the presentation on the statement of financial position would be the same, and both share capital and retained earnings would appear on the statement of changes in shareholders’ equity.
LO 1 BT: K Difficulty: S M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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9.
Financial Accounting, Seventh Canadian Edition
Intracompany ratio comparisons compare elements and ratios within the same financial statements (example, current assets and current liabilities) or between the income statement and the statement of financial position (example, basic earnings per share) from the same company. Intracompany ratio comparisons can also involve comparing elements or ratios in two or more accounting periods for the same company. Intercompany ratio comparisons compare elements or ratio results between different companies.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10.
(a)
Liquidity ratios measure a company’s short-term ability to pay its current liabilities and meet its unexpected needs for cash. Examples of liquidity ratios include working capital and current ratios.
(b)
Solvency ratios measure a company’s ability to survive over a long period of time. An example of a solvency ratio is the debt to total assets ratio.
(c)
Profitability ratios measure a company’s operating success for a given period of time. Examples of profitability ratios include basic earnings per share and the price-earnings ratio.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
11.
(a)
Working capital is arrived at by deducting current liabilities from current assets.
(b)
Positive working capital means that there are more current assets than current liabilities. Whenever there is positive working capital, the current ratio is greater than 1:1.
(c)
Having positive working capital does not mean that a company has lots of cash. It could mean the company has significant accounts receivable or inventory. The working capital may be a very large amount and yet the company may have no cash as it is instead borrowing all of the necessary cash from the bank to make day-today payments to suppliers and employees.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
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12.
Financial Accounting, Seventh Canadian Edition
The current ratio is a better measure of liquidity than working capital when making comparisons between different businesses. The amount of working capital is an absolute amount. It could vary tremendously depending on the size of the operations of the business. The current ratio on the other hand presents a relationship of current assets to current liabilities and is therefore appropriate as a tool to compare the liquidity of different size businesses.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
13.
Current assets include accounts receivable and inventory. These may have increasing balances because of uncollectible receivables or slowmoving inventory. This would cause the current ratio to increase. Even though the current ratio may seem high, it is an artificial measure of liquidity if receivables and inventory cannot be easily or quickly converted into cash. Consequently, the current ratio alone does not provide a complete assessment of liquidity.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
14.
Dong Corporation is more solvent as only 45% of its assets are financed by debt whereas 55% of Du's assets are financed by debt. A company carrying a higher proportion of debt has an increased likelihood of encountering financial difficulties and is therefore considered less solvent.
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
15.
Raising money using debt adds more risk to a company than raising money through equity because the terms of repayment of debt require cash outflows for the payment of interest and repayment of principal. These payments tap into cash balances that could hurt the company’s liquidity. In contrast to debt, equity does not have to be repaid.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
16.
Basic earnings per share comparisons among different companies are difficult due to variations in the financing structure of the companies and in the number of shares issued. Hence, there is no industry average for basic earnings per share. On the other hand, since the price-earnings ratio uses basic earnings per share relative to the market price of the common shares, the ratio can be compared among companies.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
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17.
Financial Accounting, Seventh Canadian Edition
Investors appear to favour TD Bank. Its higher price-earnings ratio indicates that investors are willing to pay proportionately more for TD's shares and have more favourable expectations of future growth.
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
18.
Increases in the basic earnings per share, price-earnings ratio, and the current ratio are considered to be signs of improvement because:
An increase in the basic earnings per share means that the amount of net income per share is greater than in the previous period.
An increase in the price-earnings ratio means that the share price has increased at a greater rate than the company’s basic earnings per share, which implies the market believes future net income will continue to increase.
An increase in the current ratio indicates that the company has more current assets available to settle its current liabilities and is more liquid (assuming the components of current assets (e.g., receivables and inventory) are also liquid.
On the other hand, the debt to total assets ratio measures how much of the company is financed by debt. The more debt a company has, the higher the debt to total assets ratio. A company with a higher debt level has increased financial risk due to higher fixed interest and principal repayments, and is less solvent than a company with a lower level of debt. LO 2 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
19.
(a)
The conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. The framework prescribes the nature, function, and limits of financial accounting statements. It guides choices about what to present in financial statements, decisions about alternative ways of reporting economic events, and the selection of appropriate ways of communicating such information.
(b)
Internationally, the conceptual framework may vary from country to country. Canadian companies use the same framework, whether they are reporting under IFRS or under ASPE.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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20.
Financial Accounting, Seventh Canadian Edition
(a)
The primary objective of financial reporting is to provide information useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company.
(b)
The main users of financial reporting are investors, lenders, and other creditors.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
21.
The going concern assumption states that the business will remain in operation for the foreseeable future. The timing of when the asset will be converted to cash or used in operations and when liabilities are to be paid determines their classification on the statement of financial position. Since the business is expected to remain in operation for the foreseeable future, these elements can continue to be reported in accordance with their respective current or non-current classifications. If the company were about to be shut down, all of its assets and liabilities would be classified as current.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
22.
The fundamental qualitative characteristics are (1) relevance and (2) faithful representation. Relevant information will impact a user’s decision by having predictive value, confirmatory value, or both. Faithful representation means that the financial statements should reflect the economic reality of what really exists or has happened. The information must be complete, neutral, and free from material error.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
23.
Enhancing qualitative characteristics make useful financial information more useful (i.e. they enhance its usefulness). To be useful, financial information must reflect the two fundamental qualitative characteristics of relevance and faithful representation. Enhancing characteristics bring more specific support to the objectives achieved by using the fundamental qualitative characteristics. Enhancing qualitative characteristics cannot enhance the usefulness of financial information that is not useful (i.e. information which does not reflect the fundamental qualitative characteristics).
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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24.
Financial Accounting, Seventh Canadian Edition
Materiality is related to relevance in that they are both defined in terms of what influences or makes a difference to the decision-maker. In order to be relevant to a financial statement user, a transaction, a narrative explanation in the notes to the financial statements, or an amount reported for an element must make a difference to the user in the making of a decision. An item is considered to be material if its omission or misstatement could influence the decision.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
25.
The four enhancing qualitative characteristics are (1) comparability, (2) verifiability, (3) timeliness, and (4) understandability. There is no prescribed order in applying these characteristics.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
26.
The cost constraint means that information will be presented only when the benefit associated with it exceeds the cost of obtaining and providing it. In attempting to fulfill a completeness objective when obtaining financial information, one could expend considerable resources. The cost of this search may greatly outweigh any benefit in achieving the completeness objective. Consequently, the search for completeness will be restricted by this constraint.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
27.
The elements of financial statements are broad categories or classes of financial statement effects of transactions and other events. They include assets, liabilities, equity, income, and expenses (which include losses). The grouping is selected in accordance with the economic characteristics of the transactions.
LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
28.
The two bases are historical cost and current value. The current value basis of accounting is applied to those assets that are intended to be sold and whose current value is readily available. Securities traded on the stock exchanges would be a good example of assets reported at their current value. The historical cost basis of accounting is used for most of the remaining assets used by the business. Since in most cases the intention is to use the assets to earn revenue, the current value of the asset is not as relevant as its historical cost.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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29.
Financial Accounting, Seventh Canadian Edition
In order to be relevant for decision making, the measurement of elements of financial statements need to reflect amounts that are reliable. For assets that are intended to be sold, the current value of the assets becomes the most relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset. On the other hand, for assets held for use by the corporation, the value at resale is not as relevant to the financial statement user. In that case, the historical cost of the assets is the better measurement for reporting the financial statement element. An example of a revenue generating asset is land used for a parking lot. It is relevant to compare the actual cost of the land to the amount of the revenue generated from its use. Using the historical cost basis of accounting gives a faithful representation to the financial statement users.
LO 3 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1 (a) (b) (c) (d) (e) (f) (g)
5 1 3 3 1 7 5
(h)
4
Accounts payable Accounts receivable Accumulated depreciation Buildings Cash Common shares Current portion of mortgage Payable Patents (q)
(i) (j) (k) (l) (m) (n) (o) (p) 5
8 5 2 3 1 1 6
Dividends declared Income tax payable Long-term Investments Land Inventory Supplies Mortgage payable, due in 20 years 1 Prepaid insurance Unearned revenue
LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 2-2 (a) (b)
1 2
Accounts receivable Accumulated depreciation
(i) (j)
(c) (d)
4 5
(k)
(e) (f) (g) (h)
1 6 2 3
Bank indebtedness Bank loan payable, due in three years Cash Common shares Equipment Goodwill (q)
1 Inventory 1 Notes receivable, due in six months 1 Prepaid rent
(l) (m) (n) (o) (p) 4
6 Retained earnings 4 Salaries payable 1 Supplies 4 Unearned revenue 1 Prepaid insurance Accounts payable
LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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BRIEF EXERCISE 2-3 SHUM CORPORATION Statement of Financial Position (Partial) Assets Current assets Cash Accounts receivable Inventory Supplies Prepaid insurance Total current assets Property, plant, and equipment Land Buildings Less: Accumulated depreciation—buildings Equipment Less: Accumulated depreciation—equipment Total property, plant, and equipment Total assets
$16,400 14,500 9,000 4,200 3,900 48,000 65,000 $110,000 33,000 $70,000 25,000
77,000 45,000 187,000 $235,000
(Assets = Liabilities + Shareholders’ equity) LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 2-4 HIRJIKAKA INC. Statement of Financial Position (Partial) Current liabilities Accounts payable Salaries payable Interest payable Income tax payable Unearned revenue Current portion of mortgage payable Total current liabilities
$22,500 3,900 5,200 6,400 900 5,000 $43,900
LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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BRIEF EXERCISE 2-5 (a)
($ in thousands) 2016 Working capital:
2015 Working capital:
$453,254 – $235,400 = $217,854 $421,955 – $223,239 = $198,716 Current Assets – Current Liabilities
Current ratio: $453,254 $235,400
Current ratio:
= 1.9:1
$421,955 $223,239
= 1.9:1
Current Assets Current Liabilities
(b)
The working capital increased slightly in 2016 and the current ratio remained the same. Indigo's liquidity is slightly stronger in 2016 compared with 2015.
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
BRIEF EXERCISE 2-6 (a)
(in US$ millions) 2016
2015
Debt to total assets ratio:
Debt to total assets ratio:
($2,705.5 + $4,554.8) = 59.0% ($2,934.8 + $9,369.1)
($2,470.3 + $4,655.1) = 64.6% ($2,742.3 + $8,286.1)
Total Liabilities Total Assets
(b)
The company’s solvency was stronger in 2016 compared with 2015 because total debt has decreased as a proportion of total assets.
LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 2-7 (a)
($ in thousands) 2015
2014
Basic earnings per share:
Basic earnings per share:
$76,629 = $1.08 per share 71,218
$75,524 = $1.07 per share 70,899
Income available to common shareholders Weighted average number of common shares
Price-earnings ratio:
Price-earnings ratio:
$13.99 = 13.0 times $ 1.08
$17.31 = 16.2 times $ 1.07
Market price per share Basic earnings per share
(b)
The increase in net income and in the basic earnings per share during the year would indicate that profitability has improved in 2015. In spite of the increase in net income, investors appear to have less confidence in Leon’s future income as indicated by the decrease in the price-earnings ratio in 2015.
LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
BRIEF EXERCISE 2-8 (a) (b) (c) (d) (e) (f)
Faithful representation Verifiability Understandability Cost Going concern Current value
LO 3 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 2-9 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m)
10 5 13 8 12 9 1 2 4 3 11 6 7
LO 3 BT: C Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 2-10 (a)
Sosa Ltd. has purchased the land for sale and not for use. The current value of the land becomes the most relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset.
(b)
Mohawk has purchased land for use and not for sale. The current value is not as relevant to the financial statement user in this case. The historical cost of the land is the better measurement for reporting the land on the statement of financial position.
LO 3 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 2-1 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n)
5 1 3 3 7 5 5 4 5 1 1 3 6 1
Accounts payable and accrued liabilities Accounts receivable Accumulated depreciation Buildings and leasehold improvements Common shares Current maturities of long-term debt Dividends payable Patents Income and other taxes payable Income and other taxes receivable Inventories Land Long-term debt Prepaid expenses
LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-2 BIG ROCK BREWERY INC. Statement of Financial Position (partial) December 31, 2015 (in thousands) Assets Current assets Cash Accounts receivable Inventories Prepaid expenses and other Total current assets Property, plant, and equipment Land Buildings Less: Accumulated depreciation Machinery and equipment Less: Accumulated depreciation Mobile equipment Less: Accumulated depreciation Office furniture and equipment Less: Accumulated depreciation Total property, plant, and equipment Intangible assets Total assets
$ 540 2,221 4,935 1,573 $ 9,269 $ 8,377 $17,692 1,817 $24,860 10,122 $ 1,054 434 $ 1,286 516
15,875 14,738 620 770 40,380 456 $50,105
LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-3 SAPUTO INC. Statement of Financial Position (partial) March 31, 2016 (in millions) Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities Income taxes payable Bank loans payable Total current liabilities Non-current liabilities Long-term debt Deferred income taxes payable Other long-term liabilities Total non-current liabilities Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity
$ 896.6 37.1 423.1 $ 1,356.8 $1,208.3 475.6 61.8 1,745.7 3,102.5 $ 821.0 3,180.8 4,001.8 $7,104.3
LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 2-4 (a)
Net income
= Revenues – Expenses = $183,040 – $158,680– $4,550 – $5,200 = $14,610
Retained earnings = Beginning retained earnings + Net income – Dividends declared = $116,520 + $14,610 – $0 = $131,130 (b)
SUMMIT LTD. Statement of Financial Position December 31, 2018 Assets
Current assets Cash Accounts receivable Supplies Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings $133,800 Less: Accumulated depreciation 50,600 Equipment $66,100 Less: Accumulated depreciation 21,470 Total property, plant, and equipment Total assets
$ 24,040 20,780 1,240 1,420 $47,480 28,970 $194,000 83,200 44,630 321,830 $398,280
Liabilities and Shareholders' Equity Current liabilities Accounts payable Interest payable Current portion of mortgage payable Total current liabilities Mortgage payable ($104,000 – $30,500) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity
$21,050 2,100 30,500 $ 53,650 73,500 127,150 $140,000 131,130 271,130 $398,280
LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 2-5 BATRA CORPORATION Income Statement Year Ended July 31, 2018 Revenues Service revenue Rent revenue Total revenues Expenses Salaries expense Operating expenses Rent expense Depreciation expense Utilities expense Interest expense Supplies expense Total expenses Income before income tax Income tax expense Net Income
$113,600 18,500 132,100 $44,700 32,500 10,800 3,000 2,600 2,000 900 96,500 35,600 5,000 $30,600
[Revenues – Expenses = Net income or (loss)]
BATRA CORPORATION Statement of Changes in Equity Year Ended July 31, 2018
Balance, August 1, 2017 Issued common shares Net income Dividends declared Balance, July 31, 2018
Common Shares
Retained Earnings
$ 15,000 10,000
$17,940
000 000 $25,000
30,600 (12,000) $36,540
Total Equity $32,940 10,000 30,600 (12,000) $61,540
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-5 (CONTINUED) BATRA CORPORATION Statement of Financial Position July 31, 2018 Assets Current assets Cash Held for trading investments Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets
$ 5,060 20,000 17,100 1,500 $ 43,660 $62,900 6,000 56,900 $100,560
Liabilities and Shareholders' Equity Current liabilities Accounts payable Interest payable Unearned revenue Bank loan payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity
$ 4,220 1,000 12,000 21,800 $ 39,020 $25,000 36,540 61,540 $100,560
(Assets = Liabilities + Shareholders’ equity) LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 2-6 (a)
Current ratio: $60,000 $40,000
= 1.5:1
Current Assets Current Liabilities
(b)
Current ratio: ($60,000 – $20,000) = 2:1 ($40,000 – $20,000)
(c)
The request of the CFO to pay off an accounts payable ahead of the due date is clearly done to manipulate the current ratio. His instructions to make the payment came after he was presented with the calculation of the current ratio. In this case the current ratio that is meant to show Padilla’s liquidity position has been artificially altered by a simple payment on account. That said, it is not unethical to pay an account payable in advance of its due date. Rather, it is the motivation for the transaction that would lead one to conclude that the CFO is acting unethically.
LO 2 BT: E Difficulty: M Time: 15 min. AACSB: Analytic and Ethics CPA: cpa-e001, cpa-t001 and cpat005 CM: Reporting
Solutions Manual .
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Chapter 2
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-7 (a)
(in thousands) 2015
2014
Working capital: $167,816 – $158,120 = $9,696
Working capital: $63,150 – $193,384 = $(130,234)
Current Assets – Current Liabilities
Current ratio: $167,816 = 1.1:1 $158,120
$63,150 = 0.3:1 $193,384
Current Assets Current Liabilities
Debt to total assets ratio: ($158,120 + $2,166,843) = 67.0% ($167,816 + 3,304,377)
($193,384 + $2,036,716) = 65.3% ($63,150 + $3,350,264)
Total Liabilities Total Assets
(b)
Crombie REIT’s liquidity improved dramatically in 2015 when compared to 2014, while at the same its solvency deteriorated slightly.
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Chapter 2
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-7 (CONTINUED) (c) Crombie Working capital (in thousands) Current ratio Debt to total assets ratio
$9,696 1.1:1 67.0%
Crombie Working capital (thousands) Current ratio Debt to total assets ratio
$(130,234) 0.3:1 65.3%
2015 CT $(215,889) 0.1:1 49.1% 2014 CT $(295,123) 0.0:1 50.2%
Choice
Industry
$(416,879) 0.4:1 90.5%
n/a 0.3 :1 43.8%
Choice
Industry
$(142,356) 0.6:1 87.3%
n/a 0.4:1 45.9%
Based on working capital and the current ratio, Crombie’s liquidity is the best (highest) of the three companies, as the current ratio far exceeds the ratios for CT and Choice as well as the industry average. Compared to 2014, Crombie and CT improved working capital and the current ratio, while both deteriorated for Choice. The industry average current ratio also declined. Based on the debt to total assets ratio, CT’s solvency is the best of the three companies, but it is not as good as the industry average. Crombie’s solvency deteriorated slightly. Choice’s solvency is the worst of the three companies. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 2-8 (a)
(in thousands) 2015
2014
Basic earnings per share:
Basic earnings per share:
$65,286 = $0.16 per share 395,793
$185,234 395,740
= $0.47 per share
Income available to common shareholders Weighted average number of common shares
Price-earnings ratio: $17.07 $0.16
Price-earnings ratio:
= 106.7 times
$18.62 $0.47
= 39.6 times
Market price per share Basic earnings per share
(b)
The decrease in the basic earnings per share during the year would indicate that profitability has deteriorated dramatically in 2015. However, investors appear to have some confidence in Cameco's future profitability as its share price has declined by only 8%.
LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting
EXERCISE 2-9 (a) (b) (c) (d) (e) (f)
7 10 11 3 2 8
(g) (h) (i) (j) (k) (l)
1 6 4 5 9 12
LO 3 BT: K Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-10 1.
(a) (b)
The historical cost basis of accounting is involved in this situation. The historical cost basis of accounting has been violated. The land was reported at its current value when it should have remained at its historical cost.
2.
(a) (b)
The current value basis of accounting is involved in this situation. The principle has not been violated since the parcel of land is being held for resale and not for use.
3.
(a)
The assumption involved in this situation is the going concern assumption. The going concern assumption has been violated. The elements on the statement of financial position should have been classified between current and non-current.
(b)
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 2-1A Statement of Financial Position Category
Item Accounts payable Accounts receivable Accumulated depreciation
Current liabilities Current assets Contra asset to property, plant, and equipment Current assets Share capital Property, plant, and equipment Current liabilities Property, plant, and equipment Goodwill Property, plant, and equipment Non-current liabilities Current assets Current liabilities
Cash Common shares Computer equipment Current portion of long-term debt Furniture and equipment Goodwill Land, buildings and improvements Long-term debt Prepaid expenses Unearned revenue
LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-2A (a) Statement of Financial Position Category
Item Accounts receivable Accumulated depreciation—aircraft Accumulated depreciation—buildings Accumulated depreciation—ground, property and equipment Aircraft
Current assets Property, plant, and equipment (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment (contra account)
Buildings Cash Ground and other property and equipment Intangible assets Inventory Other assets Prepaid expenses, deposits, and other
Property, plant, and equipment Current assets Property, plant, and equipment
Solutions Manual .
Property, plant, and equipment
Intangible assets Current assets Other assets Current assets
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-2A (CONTINUED) (b) WESTJET AIRLINES LTD. Statement of Financial Position (partial) December 31, 2015 (in thousands)
Assets Current assets Cash Accounts receivable Inventory Prepaid expenses, deposits, and other Total current assets Property, plant, and equipment Aircraft Less: Accumulated depreciation Ground and other property and equipment Less: Accumulated depreciation Buildings Less: Accumulated depreciation Total property, plant, and equipment Intangible assets Other assets Total assets
$1,252,370 82,136 36,018 131,747 $1,502,271 $3,912,617 1,170,643 $ 821,753 196,829 $ 136,783 30,419
$2,741,974 624,924 106,364 3,473,262 63,549 89,942 $5,129,024
LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-3A (a) Item Accounts payable and accrued liabilities Advance ticket sales Current portion of long-term debt Deferred income tax (long-term) Long-term debt Other current liabilities Other long-term liabilities Other shareholders’ equity items Retained earnings Share capital
(b)
Statement of Financial Position Category Current liabilities Current liabilities Current liabilities Non-current liabilities Non-current liabilities Current liabilities Non-current liabilities Shareholders’ equity Shareholders’ equity Shareholders’ equity
WESTJET AIRLINES LTD. Statement of Financial Position (partial) Liabilities and Shareholders' Equity December 31, 2015 (in thousands)
Current liabilities Accounts payable and accrued liabilities Advanced ticket sales Other current liabilities Current portion of long-term debt Total current liabilities Non-current liabilities Long-term debt Other long-term liabilities Deferred income tax Total non-current liabilities Total liabilities Shareholders' equity Share capital Retained earnings Other shareholders’ equity items Total shareholders’ equity Total liabilities and shareholders' equity
$545,438 620,216 158,880 227,391 $1,551,925 $1,276,475 13,603 327,028 1,617,106 3,169,031 $ 582,796 1,292,581 84,616 1.959.993 $5,129,024
(c) Yes, these two amounts agree. Assets of $5,129,024 thousand equal total liabilities plus shareholders’ equity of the same amount. LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4A (a) MBONG CORPORATION Income Statement Year Ended December 31, 2018 Revenues Service revenue Interest revenue Total revenues Expenses Salaries expense Operating expense Depreciation expense Repair and maintenance expense Insurance expense Utilities expense Interest expense Supplies expense Total expenses Income before income tax Income tax expense Net income
$213,900 500 $214,400 $129,800 39,400 6,200 2,800 2,200 2,000 1,500 1,000 184,900 29,500 6,000 $23,500
[Revenues – Expenses = Net income or (loss)]
MBONG CORPORATION Statement of Changes in Equity Year Ended December 31, 2018
Balance, January 1 Issued common shares Net income Dividends declared Balance, December 31
Common Shares
Retained Earnings
$30,000 4,200
$221,000
_ _____ $34,200
23,500 (5,000) $239,500
Total Equity $251,000 4,200 23,500 (5,000) $273,700
(Beginning equity ± Changes to equity = Ending equity) [Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4A (CONTINUED) (a) (continued) MBONG CORPORATION Statement of Financial Position December 31, 2018 Assets Current assets Cash $ 11,900 Held for trading investments 20,000 Accounts receivable 14,200 Supplies 200 Prepaid insurance 2,000 Total current assets Property, plant, and equipment Land $156,000 Buildings $72,000 Less: Accumulated depreciation—buildings 18,000 54,000 Equipment $66,000 Less: Accumulated depreciation—equipment 17,600 48,400 Total property, plant, and equipment Total assets Liabilities and Shareholders' Equity Current liabilities Accounts payable $15,000 Salaries payable 3,000 Current portion of bank loan payable 1,500 Total current liabilities Non-current liabilities Bank loan payable ($15,000 - $1,500) Total liabilities Shareholders' equity Common shares $ 34,200 Retained earnings 239,500 Total shareholders’ equity Total liabilities and shareholders' equity
$ 48,300
258,400 $306,700
$ 19,500 13,500 33,000
273,700 $306,700
(Assets = Liabilities + Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4A (CONTINUED) (b)
The income statement reports the net income or loss for the period. This figure is then used in the statement of changes in equity, along with dividends declared and any issues (or repurchases) of shares, to calculate the balances in common shares and retained earnings at the end of the period. These ending balances are then used in the statement of financial position to determine shareholders’ equity and complete the accounting equation.
LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-5A (a) 1.
Working capital
Current assets – Current liabilities $ 446,900 – $142,500 = $304,400
2.
Current ratio
Current assets Current liabilities $446,900
=
3.1 :1
$142,500 3.
Debt to total assets
Total liabilities Total assets $452,500
= 42.2%
$1,072,200
4.
5.
(b)
Basic earnings per share
Price-earnings ratio
Income available to common shareholders Weighted average number of common shares $160,000 = $4.00 40,000 Market price per share Basic earnings per share $35.00 = 8.8 times $4.00
Johanssen’s liquidity has improved dramatically as the working capital is greater in 2018 and the current ratio is almost double that of 2017. On the other hand, the solvency has deteriorated as the debt to total assets ratio is higher in 2018. Johanssen’s profitability has improved as the basic earnings per share ratio has increased in 2018, as has investors’ expectations for future profitability as indicated by the increasing priceearnings ratio.
LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance.
Solutions Manual .
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Chapter 2
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-6A (a) Working capital Chen Caissie
= = =
Current ratio
Current assets – Current liabilities $407,200 – $166,325 = $190,400 – $133,700 = Current assets Current liabilities
=
Chen $407,200
$240,875 $56,700
Caissie =
$190,400
2.4 :1
$166,325
=
1.4 :1
$133,700
Chen is significantly more liquid than Caissie. It has a higher current ratio and more current assets available to pay current liabilities as they come due. (b) Debt to total assets
=
Total liabilities Total assets
Chen ($166,325 + $108,500)
Caissie = 29.3%
($407,200 + $532,000)
($133,700 + $40,700)
=
52.8%
($190,400 + $139,700)
Caissie is considerably less solvent than Chen. Caissie's debt to total assets ratio of 52.8% is almost double that of Chen’s ratio of 29.3%. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-6A (CONTINUED) (c) Service revenue Operating expenses Interest expense Income tax expense Total expenses
Chen $1,800,000 1,458,000 10,000 85,000 1,553,000
Caissie $620,000 438,000 4,000 35,400 477,400
Net income
$ 247,000
$142,600
Basic earnings per share =
Income available to common shareholders Weighted average number of common shares
Chen
Caissie
$247,000 = $3.25 76,000 Price-earnings ratio
$142,600 62,000 =
Market price per share Basic earnings per share
Chen $25.00 $3.25
= 7.7 times
= $2.30
Caissie $15.00 $2.30
= 6.5 times
Based on the price-earnings ratio, investors believe that Chen will be more profitable than Caissie in the future. It is not meaningful to compare basic earnings per share between companies. LO 2 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-7A (a)
(in thousands) Le Château
Reitmans
$116,724 – $36,038 = $80,686
$319,362 – $121,172 = $198,190
1.
Working capital
2.
Current ratio
$116,724 $36,038
= 3.2:1
$319,362 $121,172
= 2.6:1
3.
Debt to total assets
$108,136 $168,490
= 64.2%
$160,915 $542,083
= 29.7%
4.
Basic earnings per share
$(35,745) 29,964
= $(1.19)
$(24,703) 64,079
= $(0.39)
5.
Price-earnings ratio
(b)
= N/A
= N/A
Liquidity With a current ratio of 3.2:1, Le Château is more liquid than Reitmans and both companies have stronger ratios than the industry average of 1.8:1. Solvency Reitmans is more solvent than Le Château as evidenced by its lower debt to total assets ratio, which is better than the industry average of 57%. Profitability Although the basic earnings per share ratio does not provide a basis for comparison by investors, both companies have net losses for the year and therefore negative earnings per share. Consequently, no priceearnings ratio can be calculated to compare to each other or to the industry average.
LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-8A (a)
The higher the amount of working capital, the better a company’ liquidity. From 2016 to 2018 Pitka Corporation’s working capital deteriorated and showed a constant downward trend over the three-year period. A higher current ratio is evidence of better liquidity for a company (assuming the components of the current assets are also liquid). Although the current ratio stayed the same from 2016 to 2017, it deteriorated 2017 to 2018 and is low. A smaller (lower) debt to total assets ratio shows evidence of better solvency. The percentage of total liabilities to total assets increased from 2016 to 2017, showing deterioration in the solvency for Pitka. On the other hand, the ratio improved substantially from 2017 to 2018. The higher the basic earnings per share, the better the profitability. Profitability decreased from 2016 to 2017, but improved from 2017 to 2018. The investors appeared to have less confidence in the future net income of Pitka as evidenced by Pitka's price-earnings ratio, which declined from 2016 to 2017. This view changed as demonstrated by the climb in the price-earnings ratio from 2017 to 2018.
(b)
Liquidity Pitka’s current ratio, although steady in 2016 and 2017, declined slightly in 2018. This trend is of concern given the low level of liquidity the company has with a current ratio of 1.1:1.
Solvency Pitka’s debt to total assets ratio improved in the last year. It appears to be reasonable in size, as does the solvency of the company in 2016.
Profitability Pitka’s profitability declined and then recovered as is demonstrated by the basic earnings per share ratio. The price-earnings ratio in 2018 indicates expectations of improving profitability. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-9A (a)
The objective of financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company. In this case, the information will be used by the team’s bank. Bucky’s suggestions concerning how elements should be reported on the financial statements do not meet the objective of financial reporting. His suggestions would lead to a violation of the fundamental basis on which financial statements are prepared: accrual accounting. The suggested changes to the financial statements would not portray economic reality and would not faithfully represent the performance of the business and its financial position at December 31, 2018. Bucky’s suggestions show bias and an attempt to portray a financial picture that would be perceived as more favourable than it is in reality.
(b)
1. Failing to include the estimated expenses for utilities and the corresponding liability for the utilities already consumed by December 31, 2018 violates accrual accounting. The expense was incurred and a liability exists, and although the exact amount is not known, a reasonable estimate can be made as this type of expense occurs often. The definitions of the elements have been met. Failing to include the expense would represent an error of omission done on purpose to increase the profitability and reduce the liabilities of the company at December 31, 2018. 2. Unless the company uses the revaluation model for all of its longlived assets, increasing the value of the building to its current value would violate the historical cost basis of accounting. It is likely far more relevant to the financial statement user of this company to see the original purchase price of the building rather than its current value as it is unlikely to be resold soon. Assets and revenue (from the recording of an unrealized gain from the increase in the value of the asset) would be overstated if Bucky’s instructions were followed. 3. The signing bonus paid to Wayne Crosby does not represent an asset at December 31, 2018. No future benefit can be derived from this payment as it was not conditional upon the occurrence of a future event. Consequently, the expenditure does not fit the definition of an asset.
LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-10A (a)
The advantage of the current value basis of accounting is that it represents a more up-to-date measurement of the value of the asset reported. Consequently, the amounts reported are more relevant to the financial statement users. The disadvantage of the current value basis of accounting and corresponding advantage of historical cost is that historical cost is more reliable and shows the amount paid for the asset. The historical cost might provide a more faithful representation because it can be easily verified and is neutral.
(b)
The reason a company might choose to adopt the current value basis of accounting for real estate is that assets reported on the statement of financial position will have higher values than they would using the historical cost basis. It is inherent in the nature of real estate that the land will increase in value over time. Creditors will find the current value a more relevant basis for making lending decisions. The increase in the assets will have a corresponding increase in equity.
(c)
The reason a company might choose to adopt the historical cost basis of accounting for real estate is that assets reported on the statement of financial position will have more faithful representation because it reports the actual cost of the asset when it was acquired and this measurement can be easily verified and it is neutral. There is also a significant cost to obtaining reliable current value information on a regular basis to be reported in the financial statements.
(d)
When comparing real estate companies, the reader is well advised to read the accounting policy note to the financial statements disclosing the measurement policy used for the real estate property. One would need to determine the corresponding current value for real estate for the company using the historical cost basis of accounting. In fact, this information is required to be disclosed for real estate companies even if they adopted the historical cost basis of accounting to improve comparability and disclosure. Otherwise, trying to compare businesses that use different bases of accounting would be very difficult.
LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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PROBLEM 2-1B Statement of Financial Position Category
Item Accumulated amortization—patents and trademarks Accumulated depreciation—industrial machinery and equipment Bank overdraft Cash Common (ordinary) shares Current borrowings and debts Income tax payable (current) Industrial machinery and equipment Inventories Land Long-term investments Non-current borrowings and debts Patents and trademarks Prepaid expenses Trade accounts payable Trade accounts receivable
Intangible assets (contra account) Property, plant, and equipment (contra account) Current liabilities Current assets Share capital Current liabilities Current liabilities Property, plant, and equipment Current assets Property, plant, and equipment Non-current assets Non-current liabilities Intangible assets Current assets Current liabilities Current assets
LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 2-2B (a) Statement of Financial Position Category
Item Accounts receivable Accumulated depreciation— buildings Accumulated depreciation— equipment Buildings Cash Equipment Goodwill Held for trading investments Inventory Land Patent Prepaid expenses
Current assets Property, plant, and equipment (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment Current assets Property, plant, and equipment Goodwill (after intangibles) Current assets Current assets Property, plant, and equipment Intangible assets Current assets
(b) DEVON LIMITED Statement of Financial Position (partial) December 31, 2018 Assets Current assets Cash $100,460 Held for trading investments 52,520 Accounts receivable 13,345 Inventory 105,320 Prepaid expenses 13,950 Total current assets Property, plant, and equipment Land $207,290 Buildings $ 58,275 Less: Accumulated depreciation 27,595 30,680 Equipment $287,400 Less: Accumulated depreciation 146,550 140,850 Total property, plant, and equipment Intangible assets Patent Goodwill Total assets
$285,595
378,820 20,225 39,590 $724,230
LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual .
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-3B (a) Item
Category
Accounts payable Common shares Current portion of mortgage payable Mortgage payable Retained earnings Unearned revenue
Current liabilities Shareholders’ equity Current liabilities Non-current liabilities Shareholders’ equity Current liabilities
(b) DEVON LIMITED Statement of Financial Position (partial) December 31, 2018 Liabilities and Shareholders' Equity Current liabilities Accounts payable Unearned revenue Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity
(c)
$ 13,100 14,180 29,000 $ 56,280 231,255 287,535 $115,400 321,295 436,695 $724,230
Yes, the total assets of $724,230 matches the total liabilities and shareholders’ equity.
LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 2-4B (a) BEAULIEU LIMITED Income Statement Year Ended December 31, 2018 Revenues Service revenue Interest revenue Total revenues Expenses Salaries expense Interest expense Depreciation expense Utilities expense Insurance expense Total expenses Income before income tax Income tax expense Net Income
$193,100 500 $193,600 $145,600 8,000 5,400 3,700 2,400 165,100 28,500 5,000 $23,500
[Revenues – Expenses = Net income or (loss)]
BEAULIEU LIMITED Statement of Changes in Equity Year Ended December 31, 2018
Balance, January 1 Issued common shares Net income Dividends declared Balance, December 31
Common Shares
Retained Earnings
$25,000 20,000
$34,000
_ _____ $45,000
23,500 (3,500) $54,000
Total Equity $59,000 20,000 23,500 (3,500) $99,000
(Beginning retained earnings ± Changes in retained earnings = Ending retained earnings) [Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]
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PROBLEM 2-4B (CONTINUED) (a) (continued) BEAULIEU LIMITED Statement of Financial Position December 31, 2018 Assets Current assets Cash Accounts receivable Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings $105,000 Less: Accumulated depreciation—buildings 12,000 Equipment $ 32,000 Less: Accumulated depreciation—equipment 19,200 Total property, plant, and equipment Total assets
$11,170 7,500 250 $ 18,920 20,000 $145,800 93,000 12,800 251,600 $290,520
Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable ($175,800 - $35,100) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders' equity
(b)
$ 9,550 6,170 35,100 $ 50,820 140,700 191,520 $45,000 54,000 99,000 $290,520
The income statement reports the net income or loss for the period. This figure is then used in the statement of changes in equity, along with dividends declared and issues (or repurchases) of shares to calculate the balances in common shares and retained earnings at the end of the period. These ending balances are then used in the statement of financial position to determine shareholders’ equity and complete the accounting equation.
LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 2-5B (a) 1.
2.
Working capital
Current ratio
Current assets – Current liabilities $253,850 – $156,550 =
$97,300
Current assets Current liabilities $253,850
=
1.6 :1
=
40.1%
$156,550
3.
Debt to total assets
Total liabilities Total assets $288,550 $719,150 Income available to common shareholders
4.
Basic earnings per share
5.
Price-earnings ratio
Weighted average number of common shares $96,600 = $2.42 40,000 Market price per share Basic earnings per share $30.00 = 12.4 $2.42
(b)
times
Fast’s liquidity has improved as the working capital is larger in 2018 and the current ratio is greater than that of 2017. The solvency has improved as the debt to total assets ratio is a smaller percentage in 2018 than in 2017. Fast’s profitability has improved dramatically as the basic earnings per share ratio has increased by a large amount in 2018, as has the priceearnings ratio, suggesting that investors are excited about the company’s future prospects. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
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PROBLEM 2-6B (a) Working capital Belliveau
= = =
Shields Current ratio
Current assets – Current liabilities $180,000 – $75,000 = $700,000 – $300,000 = Current assets Current liabilities
=
Belliveau $180,000
$105,000 $400,000
Shields =
$700,000
2.4 :1
$75,000
=
2.3 :1
$300,000
Belliveau is slightly more liquid than Shields as it has a higher current ratio, even though its absolute working capital amount is lower. (b) Debt to total assets
=
Total liabilities Total assets
Belliveau ($75,000 + $190,000) ($180,000 + $600,000)
Shields = 34.0%
($300,000 + $200,000) ($700,000 + $800,000)
= 33.3%
The debt to asset ratios are similar and both companies are solvent. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.
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PROBLEM 2-6B (CONTINUED) (c) Service revenue Operating expenses Interest expense Income tax expense Total expenses
Belliveau $450,000 390,000 6,000 10,000 406,000
Shields $890,000 679,000 10,000 65,000 754,000
Net income
$ 44,000
$136,000
Basic earnings per share =
Income available to common shareholders Weighted average number of common shares
Belliveau $44,000 200,000
Shields
= $0.22
Price-earnings ratio
$136,000 200,000 =
Market price per share Basic earnings per share
Belliveau $2.50 $0.22
= 11.4 times
= $0.68
Shields $6.00 $0.68
= 8.8 times
Investors have higher expectations for Belliveau’s future profitability, as evidenced by the price-earnings ratio. It is impractical to compare basic earnings per share between companies. LO 2 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-7B (a)
(in US$ millions) Walmart
Costco
1.
Working capital
$60,239 – $64,619 = $(4,380)
$17 ,299 – $16,540 = $759
2.
Current ratio
$60,239 $64,619
= 0.9:1
$17,299 $16,540
= 1.0:1
3.
Debt to total assets
$115,970 $199,581
= 58.1%
$22,597 $33,440
= 67.6%
4.
Basic earnings per share
$14,694 3,207
= $4.58
$2,377 439
= $5.41
5.
Price-earnings ratio
$65.39 $4.58
= 14.3 times
$133.58 $5.41
= 24.7 times
(b)
Liquidity Both companies are not very liquid, with Walmart having a working capital deficiency. Both Walmart and Costco have current ratios that are lower (worse) than the industry average. Solvency Walmart is more solvent than Costco as evidenced by its lower debt to total assets ratio. However, since both companies have a debt to total assets ratio that is lower than the industry average, they are more solvent than the average company in the industry. Profitability Although the basic earnings per share ratio does not provide a basis for comparison, investors appear to have more confidence in the future net income of Costco as evidenced by Costco’s price-earnings ratio. Both Costco and Walmart have lower price-earnings ratios than the industry. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-8B (a)
The higher the amount of working capital, the better a business’ liquidity. From 2016 to 2017, Giasson Corporation’s working capital improved. It then deteriorated from 2017 to 2018, decreasing by $17,000. A higher current ratio is evidence of better liquidity for a business, assuming all components of current assets are also liquid. The current ratio for Giasson has been deteriorating steadily from 2016 to 2018. The corporation remains liquid, as its current ratio was 1.5:1 in 2018. A smaller debt to total assets ratio shows evidence of better solvency. The percentage of total liabilities to total assets increased from 2016 to 2017, showing deterioration in the solvency for Giasson. On the other hand, this ratio improved from 2017 to 2018. Less than half of the company’s assets have been financed using debt. The higher the basic earnings per share, the better evidence of improved profitability. Profitability increased from 2016 to 2017 but declined significantly from 2017 to 2018 indicating poorer profitability. The investors appear to have less confidence in the future profitability of Giasson as evidenced by Giasson's price-earnings ratio which declined from 2016 to 2018.
(b)
Liquidity Giasson’s current ratio, although declining over the past two years, demonstrates adequate liquidity. There is $1.50 of current assets available to cover each $1 of current liabilities. Solvency Giasson’s debt to total assets ratio, although deteriorating from 2016 to 2018, remains modest in size and so the solvency of the company continues to be good. Profitability Giasson’s profitability is declining steadily as is demonstrated by the basic earnings per share ratio and the price-earnings ratio. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
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PROBLEM 2-9B (a)
The objective of financial reporting is to provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company. Virginia’s suggestions concerning how elements should be reported on the financial statements do not meet the objective of financial reporting. Two of her suggestions would lead to a violation of the fundamental basis on which financial statements are prepared: accrual accounting. The suggested changes to the financial statements would not portray the economic reality and would not faithfully represent the performance of the construction company and the financial position at its year end. Virginia’s suggestions show bias and an attempt to portray a financial picture that would be perceived as more favourable than it is in reality.
(b)
1. Failing to include the estimated expense and the related liability for the damages that have already occurred by the end of the year violates accrual accounting. The expense was incurred and a liability exists that can be estimated. The definitions of the elements have been met. Failing to include the expense would represent an error of omission done on purpose to increase the profitability and reduce the liabilities of the construction company at its year end. 2. The suggestion of increasing the revenues from construction would result not only in the recording of revenue but the recording of an accounts receivable. The revenue from construction has not been earned as no work has been performed. Furthermore, no account receivable should be recorded because no asset exists yet. Because revenue would be overstated if recorded, equity would also be overstated if Virginia’s instructions were followed. Virginia’s suggestions would not faithfully represent the reality of the performance of Ace Construction Limited for the current fiscal year. 3. Although there are no fixed repayment terms for the bank overdraft, the bank can require repayment on demand since no contract or agreement has been entered into to delay the repayment of the overdraft. For this reason, the classification of the bank overdraft as a non-current liability would falsely portray the financial position of Ace Construction Limited at the year end. When assessing the construction company’s liquidity, the users of the financial statements would be misinterpreting the financial position because of this misclassification. Classifying the debt as non-current would not faithfully represent the economic reality of the construction company’s liquidity position.
LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-10B (a)
The advantage of the current value basis of accounting is that it represents a more up-to-date measurement of the value of the asset reported. Consequently, the amounts reported are more relevant to the financial statement users. The disadvantage of the current value basis of accounting and corresponding advantage of historical cost is that historical cost is more reliable and shows the amount paid for the asset. The historical cost might provide a more faithful representation because it can be easily verified and is neutral.
(b)
The following is the recommended basis of measurement that should be used for the following purchases: 1. Due the nature of the asset, a textbook purchase should be recorded at the historical cost basis of accounting because of its intended use. The objective of owning the asset is to use it and not to immediately resell it at a profit. 2. In the case of an iPad, the use of the asset will be limited due to technological obsolescence. Because of this obsolescence, the iPad purchase should be recorded and reported using the historical cost basis of accounting. 3. Software is very similar to the iPad of item 2 above in that it becomes technologically obsolete very quickly. On the other hand, the manufacturer has recognized this problem and has included in the sale of the software, automatic upgrades to attempt to deal with the future needs and demands of the purchaser. This asset is purchased for use and not for resale at a gain and consequently the historical cost basis of accounting should be used for its recording and reporting. 4. If the purchase of the used car is for use in the business, the historical cost basis of accounting should be used. On the other hand, if the purchase is for resale, the current value basis of accounting should be used. 5. Since the intention of the buyer of land is to eventually build a home on the land, the purchase of the land should be recorded using the historical cost basis of accounting. If the intention changes over the years and the buyer decides to resell the property and intends to hold the land for resale at a gain, the reporting of the asset should change to the current value basis of accounting used for investments, assuming the current value is readily available.
LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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CT2-1 (a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
Total current assets were $335,581,000 at January 31, 2016, and $315,840,000 at January 31, 2015. Total assets were $793,795,000 at January 31, 2016, and $724,299,000 at January 31, 2015.
(b)
Current assets are listed in the order of liquidity from most to least liquid. Cash is the most liquid asset and is reported first. Non-current assets are listed in order of permanency, with property, plant, and equipment listed first.
(c)
The current liabilities total $155,501,000 at January 31, 2016, and $146,275,000 at January 31, 2015. The total liabilities at January 31, 2016 and January 31, 2015 were $436,183,000 and $395,016,000, respectively.
(d)
The current liabilities are listed in order of due date from those due first to those due last, with accounts payable and accrued liabilities listed first. It is not clear what order was chosen for non-current liabilities. Accounting standards do not suggest any particular order for the presentation of noncurrent liabilities.
LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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CT2-2
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
(a) North West (in thousands) 1. Working capital
Sobeys (in millions)
$335,581 – $155,501 = $180,080 $2,581.4 – $2,707.4 = $(126.0)
2. Current ratio
$335,581 $155,501
= 2.2:1
$2,581.4 $2,707.4
= 1.0:1
3. Debt to total assets
$436,183 $793,795
= 54.9%
$5,230.9 $7,960.6
= 65.7%
(b)
Liquidity: Working capital is not comparable, because of the differing sizes of the two companies involved. However, using the current ratio to assess liquidity, we can determine that North West is significantly more liquid than Sobeys and well ahead of the industry average. Sobeys is in a difficult position of having a working capital deficiency. Solvency: The higher a company’s percentage of debt to total assets is, the greater the risk that this company may be unable to meet its maturing obligations. North West has a better ratio than the industry while Sobeys has a worse ratio.
LO 2 BT: C Difficulty: S Time: 25 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
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CT2-3 (a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
McCain’s multinational structure means that accounting personnel from various countries are involved with preparing financial statements. Since IFRS is a global standard, most of the accounting personnel would be familiar with IFRS. Also, by using one standard across all subsidiaries, there is no need to make adjustments for various GAAP differences (this was often the case for Canadian multinationals prior to the adoption of IFRS). For McCain, it means that the company will reduce cost as well as the chance for errors. In addition, the users of McCain’s financial statements are located throughout the world. Those located in countries using IFRS, or wishing to compare McCain’s financial statements to other global public companies, would better understand financial statements prepared using this standard.
(b)
Relevance – Researchers have found that companies who voluntarily adopt IFRS find that IFRS’ accounting measures are better tools for evaluating performance. Therefore, IFRS statements are more relevant to McCain’s management. Also, when global lenders are looking at financial statements prepared according to IFRS, they are no longer concerned about differences in GAAP. This increases the relevance to lenders. Faithful Representation – In comparison to ASPE, IFRS requires more detailed information to be disclosed in the notes to the financial statements. From a user’s perspective, more information and explanation is provided to help understand the economic event being depicted. Comparability - McCain Foods is a global company that competes against various other global companies (most of whom follow IFRS). By adopting IFRS, it is easier for McCain to compare its results to other similar companies. This information would be useful to both internal users (management and shareholders) as well as external (lenders). Understandability – When different accounting standards are used by various companies within a corporate group they are less understandable. Furthermore, when users are not resident in the country where the head office of the company is located, they often have a difficult time understanding financial statements that are presented using standards that they are not familiar with. For instance, a McCain manager in a United States subsidiary that follows U.S. GAAP may have difficulty understanding the statements of a McCain subsidiary located in the U.K. (that follows IFRS).
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CT2-3 (CONTINUED) (c)
The assumption that small companies would avoid IFRS can relate to many things like: i. Not planning to take their company public in the future; ii. They like the simplicity and familiarity of ASPE; iii. They have many competitors, customers, and suppliers that use ASPE which makes their financial statements comparable and understandable. Examples of why private companies may adopt IFRS: i. Private companies that plan to be public sometime in the near future or who have foreign private investors, may choose to adopt IFRS. ii. Private companies that have global shareholders or lenders (who are more familiar with IFRS). They may also want to provide financial statements to customers.
LO 3 BT: S Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting
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CT2-4
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS. (a)
Sheila paid $25,000 for 10,000 common shares of Kenmare Architects Ltd. (or $2.50 per share) when the company was formed. This amount is reported as the balance in the Common Shares account on the statement of financial position of December 31, 2017. Sheila’s mother paid $10,000 for 1,000 common shares (or $10.00 per share) in early 2018. This amount paid can be determined by calculating the increase of $10,000 ($35,000 less $25,000) in the Common Shares account on the statement of financial position of December 31, 2018.
(b)
By December 31, 2017, Uncle Harry wanted $8,000 of the loan paid off in 2018. This amount is classified as the current portion of the loan due at December 31, 2017. The actual amount of principal paid in 2018 was $30,000. This amount paid can be determined by calculating the total decrease in the loan payable from December 31, 2017 to December 31, 2018: [($52,000 + $8,000) less ($26,000 + $4,000)]. During 2017 Uncle Harry received interest only in the amount of $3,600 as indicated in the statement of income for interest expense. In 2018, Uncle Harry received $32,700. This amount is equal to the principal repayment of $30,000 and the interest of $2,700.
(c) Current ratio
2018 $46,000 $33,580
= 1.4:1
2017 $31,000 $22,490
= 1.4:1
Although the current ratio is unchanged, we need to further examine the account balances that make up the ratio. There has been deterioration in liquidity due to the declining cash balance and a significant rise in accounts receivable which may indicate difficulty in collecting amounts owed from customers. This decreased cash flow from customers has probably caused the increase in accounts payable as the company seems to have delayed payment to suppliers.
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CT2-4 (CONTINUED) (d) Debt to total assets
2018 $59,580 $106,000
= 56.2%
2017 $74,490 $103,000
= 72.3%
Kenmare’s solvency improved significantly. The decrease in the ratio occurred mainly because of changes in the numerator rather than in the denominator. Total liabilities fell because of the large pay down of the loan from the uncle even though accounts payable rose. This had an impact on the income statement by lowering interest expense because of the lower loan balance. Because Kenmare’s debt level is lower, the amount of interest expense is also lower, making the business more profitable. (e) Basic earnings per share
2018 $7,910 11,000
= $0.72
2017 $3,510 10,000
= $0.35
The basic earnings per share more than doubled because net income more than doubled while there was only a 10% increase in the number of shares. (f)
Sheila paid $2.50 per share for her shares ($25,000 ÷ 10,000). The amount Sheila’s mother paid for her shares was $10.00 per share ($10,000 refer to part (a) above ÷ 1,000). 2018 2017 Price-earnings $10.00 = 13.9 times $2.50 = 7.1 times ratio $0.72 $0.35 The service revenue increased 20% from 2017 to 2018 [($120,000 – $100,000) ÷ $100,000]. The net income increased by 125% from 2017 to 2018 [($7,910 – $3,510) ÷ $3,510]. Sheila’s salary increased by 25% from 2017 to 2018 [($74,000 – $59,000) ÷ $59,000]. The price-earnings ratio changed mostly because of the price difference paid by the two shareholders. Sheila’s mother paid four times the price Sheila paid for her shares. This increase is very dramatic taking into account other ratios for measurement of performance. The fourfold increase in the share price is not justified by the financial performance of the business. The future profitability of the business is based on the amount of service revenue that can be generated by the single employee, Sheila, and is therefore limited.
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Financial Accounting, Seventh Canadian Edition
CT2-4 (CONTINUED) (g)
The likely reason for the sale in shares in 2018 was to obtain $10,000, which was used to repay the debt to Uncle Harry earlier than originally scheduled.
LO 1,2 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
CT2-5 (a)
Financial Accounting, Seventh Canadian Edition
ETHICS CASE
The stakeholders in this case are: Kathy Onishi, controller Redondo’s vice-president of finance Users of the company's financial statements, including shareholders and creditors
(b)
The ethical consideration in this situation is whether or not switching from ASPE to IFRS would affect the decisions of the users of the financial statements. Because Redondo Corporation is a private corporation, the use of IFRS is not required. It is ethically preferable to disclose the most financially relevant information to the users of the financial statements so that they can make informed decisions. One should question the reasoning of Redondo’s vice-president of finance who is focusing on the effect of the implementation on the net income for the year.
(c)
As the controller, by supporting the conversion from ASPE to IFRS, Kathy could gain the trust and respect of the board of directors and the shareholders in general. The users of the company’s financial statements will find the information provided under IFRS to be more useful in making comparisons with Redondo’s competitors. This in turn will lead to better decisions being made by users of the financial statements.
LO 3 BT: E Difficulty: M Time: 15 min. AACSB: Ethics CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
CT2-6 (a)
Financial Accounting, Seventh Canadian Edition
SERIAL CASE
Software Solutions’ financial statements will include the statement of financial position, income statement, statement of changes in equity, and statement of cash flows. It may also include a statement of comprehensive income. It will also include the notes to the financial statements. The statement of financial position reports the assets, liabilities, and shareholders’ equity at a specific date. The income statement presents the revenues and expenses and resulting net income or loss for a specific period of time. The statement of changes in equity summarizes the changes in equity accounts, including common shares and retained earnings, for a specific period of time. Finally, the statement of cash flows provides information about the cash inflows and cash outflows provided or used for operating, investing, and financing activities for a specific period of time.
(b)
Because Software Solutions is public company, it is required to have its financial statements audited. The auditor’s report provides users with assurance that the financial statements are fairly presented. As a public company, Software Solutions is also required to file financial statements on a timely basis with the regulator of the stock exchange on which its share trade.
(c)
By looking at the statement of financial position and determining the composition of Software Solutions’ current assets and current liabilities, we can assess its ability to pay its short-term obligations. We can also calculate liquidity ratios, such as working capital and the current ratio, for the current and prior periods to help determine its ability to meet its current obligations. This will not guarantee that Software Solutions is able to pay ABC’s invoices in the future, but it will provide some assurance with respect to how it has performed in the past. The statement of cash flows also provides information to determine if Software Solutions generates positive cash flows from its operating activities.
(d)
By looking at the types of revenues and expenses reported in the income statement, we can determine if Software Solutions is profitable. If revenues earned by Software Solutions exceed expenses incurred, then Software Solutions is profitable. As well, profitability ratios that measure a company’s ability to generate net income over a period of time can be determined. These profitability ratios include basic earnings per share and the price-earnings ratio. The latter measures investors’ expectations about Software Solutions’ future profitability.
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
CT2-6 (CONTINUED) (e)
By looking at the statement of financial position, we can determine Software Solutions’ total liabilities, and the mix of current and non-current debt. We can also calculate solvency ratios, such as the debt to total assets ratio, to determine whether Software Solutions has the ability to repay its total debt. Solvency ratios help measure a company’s ability to survive over a long period of time. Reviewing the company’s income statement and statement of cash flows helps in determining whether Software Solutions is able to pay its interest expense. The more profitable the company, the better able it is to make the interest payments on its debt and generate sufficient cash to repay its obligations.
(f)
Be aware that the financial statements of Software Solutions provide a historical perspective of what has already taken place. The financial statements may not prove to be the best indicator of what will happen in the future. Consumer tastes change and as a result the demand for Software Solutions’ products may also change. As well, consider this business opportunity from your perspective. Ask yourself if the price obtained for the hours worked is reasonable considering some of the risks involved. There is a risk that, by taking on this obligation, additional opportunities cannot be pursued. Does Anthony Business Company have the ability to meet the demands of Software Solutions? Is it able to commit to providing 500 hours of service per month? Does it have enough staff to enable the company to do so? Does it have enough cash to pay for the staff that will be required, along with other operating expenses, and wait 30 days from the date of the invoice to collect from Software Solutions?
LO 2,3 BT: E Difficulty: M ime: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
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Chapter 2
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM LEARNING OBJECTIVES 1. 2. 3. 4. 5.
Analyze the effect of transactions on the accounting equation. Explain how accounts, debits, and credits are used to record transactions. Journalize transactions in the general journal. Post transactions to the general ledger. Prepare a trial balance.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO 1. 2. 3. 4.
1 1 1 2
BT Item LO
BT Item LO BT Item LO Questions
BT Item LO
BT
C C C C
C C C C
5. 6. 7. 8.
2 2 3 3
9. 10. 11. 12.
3,4 3,4 4 4
C C K K
13. 14. 15. 16.
4 5 5 5
K C C C
17. 1,3,4,5
C
AP
10.
4
AP
13.
5
AN
AP
Brief Exercises 1.
1
C
4.
2
AP
7.
3
2.
1
AN
5.
1,2
AN
8.
3
AP
11.
4
AP
3.
2
AP
6.
3
AP
9.
4
AN
12.
5
AP
10.
4,5
AP
13.
5
Exercises 1.
1
AN
4.
1,2
AN
7.
1,2,3,4 AN
2.
1
AN
5.
3
AP
8.
4
AP
11.
5
AP
14.
5
AP
3.
2
K
6.
3
AP
9.
4
AN
12.
5
AP
15.
5
AN
Problems: Set A and B 1.
1
AN
4.
2
K
7.
3,4
AP
10.
5
AP
2.
1
AN
5.
1,2,3
AN
8.
3,4,5
AP
11.
5
AP
3.
2
AP
6.
3
AP
9.
3,4,5
AP
12.
5
AN
Accounting Cycle Review 1.
3,4,5
AP
2.
3,4,5
AP
Cases 1.
1
AP
3.
3,4,5
E
5.
5
S
2.
1
AN
4.
5
AN
6.
3,4,5
AN
Solutions Manual .
3-1
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
Legend: The following abbreviations will appear throughout the solutions manual file.
LO
Learning objective
BT
Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation
Difficulty:
Level of difficulty S Simple M Moderate C Complex
Time:
Estimated time to prepare in minutes
AACSB
Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflec. Thinking Reflective Thinking
CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006
CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation
Solutions Manual .
3-2
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
(a)
(b)
Only events that cause a change in an asset, liability, or shareholders’ equity account are recorded as accounting transactions. Other events, such as the agreement to provide a service, do not immediately impact an asset, liability, or shareholder’s equity account and, therefore, are not considered an accounting transaction. Examples of events that would not be recorded include hiring employees, signing a lease, and placing an order to purchase services.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2.
Accounting transactions that affect the accounting equation (assets = liabilities + shareholders’ equity) should be recorded. (a)
(b)
(c) (d)
(e)
Winning an award is not an accounting transaction, as it does not affect the accounting equation. The award did not involve the receipt of an asset, such as cash. Supplies purchased on account is an accounting transaction because it affects the accounting equation (assets are increased because supplies were received and liabilities are increased because accounts payable were incurred). A shareholder dying is not an accounting transaction, as it does not affect the accounting equation. Declaring and paying a cash dividend to shareholders is an accounting transaction as it does affect the accounting equation (shareholders’ equity is decreased and assets (cash) are decreased). The agreement to provide legal services to the company is not an accounting transaction as it does not affect the accounting equation. No expense has been incurred yet and no liabilities have been affected as yet. Once the lawyer begins providing services and an amount is paid or owed, then a transaction would be recorded.
LO 1 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
3.
Yes, a company can enter into a transaction in which only the left (assets) side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. A decrease in the Accounts Receivable account which is offset by an increase in the Cash account is a specific example (that is, a customer paying for goods previously purchased on account).
LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
4.
Financial Accounting, Seventh Canadian Edition
The structure of the accounting equation matches the debit-credit rules in accounting. Assets are shown on the left-hand side of the accounting equation and debits are shown on the left-hand side of the accounting equation and T accounts. Because of this, asset accounts have normal debit balances. Liabilities and shareholders’ equity are shown on the right-hand side of the accounting equation and credits are shown on the right-hand side of the accounting equation and T accounts. Liabilities and shareholders’ equity accounts (such as share capital and retained earnings) have normal credit balances. Following the debit-credit rules will ensure that the accounting equation will be consistently applied.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5.
Shareholders' equity consists of different components, and they do not all move in the same direction. Shareholders’ equity is usually comprised of share capital (which is increased by credits) and retained earnings. Retained earnings can be further subdivided into revenues and expenses and dividends declared which are then added to opening retained earnings in the case of revenues, and deducted from opening retained earnings in the case of expenses and dividends. Revenues are increased by credits while expenses and dividends declared are increased by debits.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
6.
Emily is likely relating the term debit and credit to the normal balances of accounts. Since assets have normal debit balances and, from a personal standpoint, acquiring and possessing assets is viewed in a positive light, it might follow in Emily’s mind that debits are favourable. On the other hand, liabilities have a normal credit balance and might be viewed by Emily in a negative light because debt is unfavourable from a personal standpoint. However, Emily is incorrect. Debits mean nothing more than the left side of accounts and credits the right side of the accounts. Neither is favourable or unfavourable.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
7.
(a) (b)
Solutions Manual .
A general journal is a book of original entry, in which transactions are recorded in chronological order. The general journal facilitates the recording process by documenting the debit and credit effects on specific accounts. The general journal discloses the complete effect of a transaction in one place, including an explanation and, where applicable, identification of the source document. The general journal provides a chronological record of transactions and it helps to prevent and locate errors, because the debit and credit amounts for each entry can be quickly compared. 3-4
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
8.
While the account title choices suggested by Meghan provide details of the type of truck the company purchased, the title of the account used to record the purchase should be more generic to include all types of trucks and other vehicles that can be owned and used by the business. Ambiguous or multiple account titles with similar names can lead to incorrect financial reporting. The name of the account often used by companies for purchases of this nature is Vehicles.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
9.
This would not be efficient because the journal provides a record that shows both “sides” of the transaction along with a description of the transaction. This information is vital to the understanding of the event. A general ledger is not intended to be used to capture the recording of transactions, but to tabulate the effects of transactions in separate accounts. The balances arrived at in the ledger are then used to communicate information to the users of the financial statements. If one attempted to omit the use of journal entries, one could not retrace the transactions as they originated in the journal. One would only see one side of a transaction at a time by looking at an account in the ledger. It would become very confusing and unruly to try to keep track of transactions.
LO 3,4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10.
Posting should be done on a timely basis, at least monthly, so that account balances can be monitored and reconciled. This ensures that any errors are identified as soon as possible.
LO 3,4 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
11.
(a)
(b)
The general ledger is the entire group of accounts maintained by a company, including all the asset, liability, and shareholders' equity accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts. The general ledger is often arranged in the order in which accounts are presented in the financial statements, beginning with the statement of financial position accounts. The asset accounts come first, followed by liability accounts, and then shareholders’ equity accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts.
LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-5
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
12.
(a)
(b)
Financial Accounting, Seventh Canadian Edition
The chart of accounts is a list of a company’s accounts. The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the general ledger. Numbering the accounts helps identify and sort the accounts.
LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
13.
Cash, Accounts Receivable, Supplies, Prepaid Insurance, Accounts Payable, Unearned Revenue, Common Shares, Dividends Declared, Service Revenue, Salaries Expense, and Income Tax Expense.
LO 4 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
14.
(a)
(b)
A trial balance is a list of accounts and their balances at a point in time. The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements. While it does not matter in what order the accounts are listed in the trial balance, it is usual for the accounts in the trial balance to be listed in the same order as they are listed in the general ledger (asset accounts, liability accounts, and shareholders’ equity accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts). This makes it easier to compare the trial balance accounts to the general ledger accounts, as well as to prepare the financial statements from the trial balance.
LO 5 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
15.
The retained earnings account in the unadjusted trial balance shows the beginning balance of the period (which is the same as the ending balance of the prior period) as it has not yet been updated for the effect that the revenues, expenses, and dividends declared have on retained earnings for the current accounting period. (Note to instructors: This chapter only includes references to an unadjusted and pre-closing trial balance; the post-closing trial balance is not introduced until Chapter 4.)
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-6
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
16.
Financial Accounting, Seventh Canadian Edition
Claire, here are some tips to help you find the $100 difference in the trial balance columns assuming it is a single error: 1.
2.
3.
4.
If the difference between the debit and credit totals is an amount such as $1, $100, or $1,000, re-add the trial balance columns and recalculate the account balances. If the amount of the difference can be evenly divided by two, (which it is in this case) scan the trial balance to see if a balance equal to half the error has been entered in the wrong column. If the amount of the difference can be evenly divided by nine, (which it is not in this case) retrace the account balances on the trial balance to see whether they have been incorrectly copied from the ledger. For example, if a balance was $12 but was listed as $21, a $9 error has been made. Reversing the order of numbers is called a transposition error. A slide, which is adding or deducting one or several zeros in a figure, has the same effect. If the amount of the difference cannot be evenly divided by two or nine, scan the ledger to see whether an account balance in the amount of the error has been omitted from the trial balance. Scan the journal to see whether a posting in the amount of the error has been omitted.
When all else fails, all of the transactions should be carefully traced through the process again. LO 5 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
17.
The first four steps in the accounting cycle are: (a) (1) Analyze the business transactions and determine their effects on the accounting equation and also determine when and how to record the transactions. (2) Journalize the transactions in the general journal to record the effects of the transactions on the accounts involved in the transactions. (3) Post to the general ledger accounts to provide an accumulation of the effect of several journalized transactions in the individual accounts. (4) Prepare a trial balance to prove that the sum of the debit account balances equals the sum of the credit account balances after posting. (b) It does matter in which order the steps of the accounting cycle are completed. Each step performed has been designed in the sequence with the understanding that the previous step has been performed. Failing to do so would result in incomplete and inaccurate financial information.
LO 1,3,4,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual .
3-7
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 (a) Assets 1. 2. 3. 4. 5. (b)
= (+) (-) NE NE (+) NE
Liabilities
+ NE NE NE NE NE
Shareholders’ Equity NE NE NE (+) NE
Items 1 and 4 are accounting transactions that should be recorded in the accounting records. Each of these transactions have an impact on the accounting equation as shown in part (a). Items 2, 3, and 5 should not be recorded in the accounting equation. They do not yet impact the accounting equation.
LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-8
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-2 Assets
=
Liabilities
Shareholders’ Equity Retained Earnings
+
= Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Total
Cash
Accounts Receivable
Supplies +$250
Prepaid Insurance
Accounts Payable +$250
Unearned Revenue
Common + Shares
+$500 –$300 +5,000 –100 +500 −250 –100 +300
−500
$5,050
+ $0
– Expenses
– Dividends Declared
+$500 −$300 +$5,000 −$100 −250 +$100
+$250
+ $100 =
$0
+$300 −300 + $0
+ $5,000
+300 + $800
– $300
TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $5,400
TOTAL ASSETS = $5,400
LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
+ Revenues
3-9
Chapter 3
– $100
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-3
1. Accounts Payable
(a) Basic Type Liability
(b) Normal Balance Credit
(c) Debit Effect decrease
(d) Credit Effect increase
2. Accounts Receivable
Asset
Debit
increase
decrease
3. Cash
Asset
Debit
increase
decrease
4. Common Shares
Shareholder's equity
Credit
decrease
increase
5. Dividends Declared
Shareholder's equity
Debit
increase
decrease
Debit
increase
decrease
Debit
increase
decrease
Credit
decrease
increase
Credit
decrease
increase
Credit
decrease
increase
6. Equipment 7. Income Tax Expense 8. Retained Earnings 9. Service Revenue 10. Unearned Revenue
Asset Shareholder's equity Shareholder's equity Shareholder's equity Liability
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-10
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-4 (a) Transaction
Basic Type
Account Debited (b) Specific Account
(c) Effect
Account Credited (a) (b) Specific Basic Type Account
Effect
1.
Asset
Cash
Increase
Shareholders’ equity
Common Shares
Increase
2.
Asset
Prepaid Rent
Increase
Asset
Cash
Decrease
3.
Shareholders’ equity
Salaries Expense
Increase
Asset
Cash
Decrease
4.
Asset
Accounts Receivable
Increase
Shareholders’ equity
Service Revenue
Increase
5.
Asset
Cash
Increase
Asset
Accounts Receivable
Decrease
6.
Asset
Supplies
Increase
Liability
Accounts Payable
Increase
7.
Liability
Accounts Payable
Decrease
Asset
Cash
Decrease
8.
Asset
Cash
Increase
Liability
Bank Loan Payable
Increase
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
(c)
3-11
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-5 Transaction 1
June 1: Issued common shares to shareholders in exchange for $2,500 cash.
(a) Basic Analysis
The asset account Cash is increased by $2,500; the shareholders’ equity account Common Shares is increased by $2,500.
(b) Equation Analysis
Assets
=
Liabilities
+
Cash +$2,500
Shareholders’ Equity Common Shares +$2,500
(c) Debit−Credit Analysis
Debits increase assets: debit Cash $2,500. Credits increase share capital (shareholders’ equity): credit Common Shares $2,500.
Transaction 2
June 4: Purchased supplies on account for $250.
(a) Basic Analysis
The asset account Supplies is increased by $250; the liability account Accounts Payable is increased by $250.
(b) Equation Analysis
Assets
=
Liabilities
Solutions Manual .
Shareholders’ Equity
Accounts Payable +$250
Supplies +$250
(c) Debit−Credit Analysis
+
Debits increase assets: debit Supplies $250. Credits increase liabilities: credit Accounts Payable $250.
3-12
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-5 (CONTINUED) (a), (b), and (c) (continued) Transaction 3
June 7: Billed J. Kronsnoble $300 for welding work done.
(a) Basic Analysis
The asset account Accounts Receivable is increased by $300; the revenue account Service Revenue is increased by $300.
(b) Equation Analysis
Assets
=
Liabilities
+
Accounts Receivable +$300
Shareholders’ Equity Service Revenue +$300
(c) Debit−Credit Analysis
Debits increase assets; debit Accounts Receivable $300. Credits increase revenues; credit Service Revenue $300.
Transaction 4
June 18: Received partial payment from J. Kronsnoble for work billed on June 7.
(a) Basic Analysis
The asset account Cash is increased by $200; the asset account Accounts Receivable is decreased by $200.
(b) Equation Analysis
Assets
=
Liabilities
+
Shareholders’ Equity
Cash +$200 Accounts Receivable -$200 (c) Debit−Credit Analysis
Solutions Manual .
Debits increase assets: debit Cash $200. Credits decrease assets: credit Accounts Receivable $200.
3-13
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-5 (CONTINUED) (a), (b), and (c) (continued) Transaction 5
June 25: Hired new employee to start work on July 3.
(a) Basic Analysis
An accounting transaction has not occurred. There is only an agreement of employment to start on July 3.
Transaction 6
June 27: Received cash of $200 from Liu Controls Ltd. as a deposit for welding work to be done in July.
(a) Basic Analysis
The asset account Cash is increased by $200; the liability account Unearned Revenue is increased by $200.
(b) Equation Analysis
Assets
=
Liabilities
Solutions Manual .
Shareholders’ Equity
Unearned Revenue +$200
Cash +$200
(c) Debit−Credit Analysis
+
Debits increase assets: debit Cash $200. Credits increase liabilities: credit Unearned Revenue $200.
3-14
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-5 (CONTINUED) (a), (b), and (c) (continued) Transaction 7
June 28: Paid for supplies purchased on June 4.
(a) Basic Analysis
The asset account Cash is decreased by $250; the liability account Accounts Payable is decreased by $250.
(b) Equation Analysis
Assets
=
Liabilities
+
Shareholders’ Equity
Accounts Payable -$250
Cash -$250
(c) Debit−Credit Analysis
Debits decrease liabilities: debit Accounts Payable $250. Credits decrease assets: credit Cash $250.
Transaction 8
June 29: Paid $100 for monthly income tax instalment.
(a) Basic Analysis
The expense account Income Tax Expense is increased by $100; the asset account Cash is decreased by $100.
(b) Equation Analysis
Assets
=
Liabilities
Cash -$100
(c) Debit−Credit Analysis
+
Shareholders’ Equity Income Tax Expense -$100
Debits increase expenses: debit Income Tax Expense $100. Credits decrease assets: credit Cash $100.
LO 1,2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-15
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-6 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Supplies ....................................................... Accounts Payable .................................
250
Accounts Receivable ................................... Service Revenue ...................................
500
Salaries Expense ......................................... Cash ......................................................
300
Cash ............................................................ Common Shares ...................................
5,000
Dividends Declared ...................................... Cash ......................................................
100
Cash ............................................................ Accounts Receivable .............................
500
Accounts Payable ..................................... Cash ...................................................
250
Prepaid Insurance ........................................ Cash ...................................................
100
Cash .......................................................... Unearned Revenue ............................
300
Unearned Revenue .................................... Service Revenue ................................
300
250
500
300
5,000
100
500
250
100
300
300
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-16
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-7 1.
2.
3.
4.
5.
6.
7.
8.
Cash ............................................................ Common Shares ...................................
5,000
Prepaid Rent ................................................ Cash ......................................................
2,100
Salaries Expense ......................................... Cash ......................................................
500
Accounts Receivable ................................... Service Revenue ...................................
1,200
Cash ............................................................ Accounts Receivable .............................
900
Supplies ....................................................... Accounts Payable..................................
500
Accounts Payable ........................................ Cash ......................................................
500
Cash ............................................................ Bank Loan Payable ...............................
1,000
5,000
2,100
500
1,200
900
500
500
1,000
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-17
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-8 June
1
4
7
18
Cash ....................................................... Common Shares..........................
2,500
Supplies ................................................. Accounts Payable ........................
250
Accounts Receivable .............................. Service Revenue .........................
300
Cash ....................................................... Accounts Receivable ...................
200
2,500
250
300
200
25
No transaction – no asset, liability, or equity account affected
27
Cash ..................................................... Unearned Revenue ......................
200
Accounts Payable .................................. Cash ............................................
250
Income Tax Expense ............................. Cash ............................................
100
28
29
200
250
100
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-18
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-9 Accounts Receivable Aug. 10 17,500 15 6,500 Aug. 23 (a) 15,000 Bal. 9,000 Sept. 5 (b) 4,000 Sept. 15 8,000 Bal. 5,000
Accounts Payable Aug. 5 (c) 6,000 18 3,400 Aug. 29 5,800 Bal. 3,600 Sept. 12 7,700 Sept. 23 5,900 Bal. (d) 5,400
(a)
$17,500 + $6,500 – $9,000 = $15,000
(b)
$5,000 – $9,000 + $8,000 = $4,000
(c)
$3,600 + $5,800 – $3,400 = $6,000
(d)
$3,600 + $7,700 – $5,900 = $5,400
(e)
$50,000 – $500 + $45,000 = $94,500
(f)
$99,000 + $450 – $94,500 = $4,950
Service Revenue Aug. 10 50,000 Aug. 12 500 15 45,000 Bal. (e) 94,500 Sept. 5 (f) 4,950 Sept. 25 450 Bal. 99,000
LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-19
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-10 June 1 June 18 June 27 Bal.
Cash 2,500 June 28 200 June 29 200 2,550
June 7 Bal.
Accounts Receivable 300 June 18 100
June 4
June 28
June 29
250 100
200
Supplies 250 Accounts Payable 250 June 4 Bal.
250 0
Unearned Revenue June 27
200
Common Shares June 1
2,500
Service Revenue June 7
300
Income Tax Expense 100
LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-20
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-11 (a) May 4 May 7 May 11 May 21 May 25 May 28 May 31
Billed clients $3,200 for services provided on account Declared and paid dividends of $500 Collected $1,900 from a customer on account Received $2,000 from client for services provided Paid salaries of $2,500 Paid supplier $200 on account Paid income tax of $750
(b) Apr. 30 May 11 May 21 Bal.
Apr. 30 May 4 Bal.
May 28
May 7
Cash 1,500 May 7 1,900 May 25 2,000 May 28 May 31 1,450 Accounts Receivable 1,800 May 11 3,200 3,100 Accounts Payable 200 Apr. 30 Bal.
500 2,500 200 750
1,900
900 700
Dividends Declared 500 Service Revenue May 4 May 21 Bal.
May 30
Income Tax Expense 750
May 25
Salaries Expense 2,500
3,200 2,000 5,200
LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-21
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-12 (a)
Account Normal Balance Accounts payable ............................................................ Credit Accounts receivable ........................................................ Debit Accumulated depreciation—equipment ........................... Credit Cash ................................................................................ Debit Common shares .............................................................. Credit Dividends declared .......................................................... Debit Equipment ....................................................................... Debit Held for trading investments............................................ Debit Income tax expense ........................................................ Debit Rent expense .................................................................. Debit Retained earnings ........................................................... Credit Salaries expense ............................................................. Debit Service revenue .............................................................. Credit Unearned revenue .......................................................... Credit
(b) CARLAND INC. Trial Balance June 30, 2018 Debit Cash Accounts receivable Held for trading investments Equipment Accumulated depreciation—equipment Accounts payable Unearned revenue Common shares Retained earnings Dividends declared Service revenue Salaries expense Rent expense Income tax expense Totals
Credit
$ 4,400 4,000 6,000 17,000 $ 3,600 3,000 150 10,000 12,650 200 7,600 4,000 1,000 400 $37,000
_ $37,000
(Total of debit account balances = Total of credit account balances) LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-22
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-13 Error 1. 2. 3. 4. 5. 6.
(a) In Balance No No Yes Yes Yes No
(b) Difference $ 900 1,000 N/A N/A N/A 1,000
(c) Larger Column Debit Credit N/A N/A N/A Debit
LO 5 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-23
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 3-1 (a) 1.
Received cash of $1,000 from a customer as a deposit for work to be done in the future. 2. Purchased equipment for $5,000 paying cash $1,000 with the remaining balance of $4,000 on account. 3. Paid $750 for supplies. 4. Performed services for $9,500 collecting cash of $4,100 and the remaining balance on account of $5,400. 5. Paid $2,000 to suppliers on account. 6. Declared and paid dividends of $1,000. 7. Paid for operating expenses of $4,800 8. Collected $5,000 on account from customers. 9. Paid interest expense of $300 10. Paid income tax expense of $880.
(b) Service revenue Less: Expenses Operating expenses Interest expense Income tax expense Total expenses Net income
$9,500 $4,800 300 880 5,980 $3,520
Retained earnings: Beginning balance Add: Net income Less: Dividends declared Ending balance
$4,500 3,520 (1,000) $7,020
[Revenues – Expenses = Net income or (loss)]
Solutions Manual .
3-24
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-1 (CONTINUED) (c) =
Assets
Liabilities
Shareholders’ Equity
+
Retained Earnings
Cash
Accounts Receivable Supplies Equipment =
Accounts Payable
Unearned Common Revenue + Shares
$2,000
$5,000
Bal.
+ – Revenues Expenses
July 31 Bal. (1)
$6,500 1,000
(2)
−1,000
(3)
−750
(4)
+4,100
(5)
-2,000
(6)
-1,000
(7)
-4,800
(8)
+5,000
(9)
-300
-300
(10)
-880
-880
Aug. 31 Bal.
$5,870
$5,000
$4,500
+$1,000 +$5,000
+4,000
+750 +5,400
+$9,500 -2,000 -$1,000 -$4,800
-5,000
+ $5,400
+ $750
+ $5,000 =
$4,000
+ $1,000
+ $5,000
+$4,500
+ $9,500
- $5,980
TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $17,020
TOTAL ASSETS = $17,020
LO 1 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
– Dividends Declared
3-25
Chapter 3
- $1,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-2 Assets
Trans. Apr. 30 Bal. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. May 31 Bal.
Cash $5,000
=
Liabilities
Accounts Prepaid Accounts Receivable Insurance Equipment = Payable $6,000 $2,000
+$8,000
Bank Loan Payable
Shareholders’ Equity Retained Earnings
+
+
Common + Shares Balance Revenues $5,000 $4,000
-$1,600 +$3,800
+$3,800 −300 +$20,000 −8,000 +$500
−3,000 −$500 + $6,800
+ $500
+ $8,000 =
$2,000
+ $20,000
+$5,000 +$4,000
+ $3,800
−250 – $2,150
TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $32,150
TOTAL ASSETS = $32,150
LO 1 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
– Dividends Declared
+$8,000
−1,600 −300 +20,000 −8,000 −500 +3,000 −500 −250 $16,850
– Expenses
3-26
Chapter 3
– $500
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-3 (a) Type of Account
(b) Normal Balance
Bank loans payable
Liabilities
Credit
Buildings
Assets
Debit
Cash
Assets
Debit
Depreciation expense
Expenses
Debit
Income Statement
Dividends declared
Dividends
Debit
Statement of Changes in Equity
Finance income
Revenues
Credit
Income Statement
Furniture, machinery, and equipment
Assets
Debit
Statement of Financial Position
Income tax expense
Expenses
Debit
Income Statement
Income taxes payable
Liabilities
Credit
Statement of Financial Position
Interest expense
Expenses
Debit
Income Statement
Inventories
Assets
Debit
Prepaid expenses
Assets
Debit
Receivables
Assets
Debit
Revenues
Revenues
Credit
Account
(c) Financial Statement Statement of Financial Position Statement of Financial Position Statement of Financial Position
Statement of Financial Position Statement of Financial Position Statement of Financial Position Income Statement
LO 2 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-27
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-4 Transaction 1
March 2: Issued common shares for $11,000 cash.
(a) Basic Analysis
The asset account Cash is increased by $11,000; the shareholders’ equity account Common Shares is increased by $11,000.
(b) Equation Analysis
Assets
=
Liabilities
+
Cash +$11,000
Shareholders’ Equity Common Shares +$11,000
(c) Debit−Credit Analysis
Debits increase assets: debit Cash $11,000. Credits increase share capital (shareholders’ equity): credit Common Shares $11,000.
Transaction 2
March 4: Purchased used car for $1,000 cash and $9,000 on account, for use in the business.
(a) Basic Analysis
The asset account Vehicles is increased by $10,000; the liability account Accounts Payable is increased by $9,000; the asset account Cash is decreased by $1,000.
(b) Equation Analysis
Assets
=
Liabilities
+
Shareholders’ Equity
Account Payable +$9,000
Cash -$1,000 Vehicles +$10,000 (c) Debit−Credit Analysis
Solutions Manual .
Debits increase assets: debit Vehicles $10,000. Credits increase liabilities: credit Accounts Payable $9,000. Credit decrease assets: credit Cash $1,000.
3-28
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-4 (CONTINUED) (a), (b), and (c) (continued) Transaction 3
March 10: Billed customers $2,300 for services performed.
(a) Basic Analysis
The asset account Accounts Receivable is increased by $2,300; the revenue account Service Revenue is increased by $2,300.
(b) Equation Analysis
Assets
=
Liabilities
+
Accounts Receivable +$2,300
Shareholders’ Equity Service Revenue +$2,300
(c) Debit−Credit Analysis
Debits increase assets: debit Accounts Receivable $2,300. Credits increase revenues: credit Service Revenue $2,300.
Transaction 4
March 13: Paid $225 cash to advertise business opening.
(a) Basic Analysis
The expense account Advertising Expense is increased by $225; the asset account Cash is decreased by $225.
(b) Equation Analysis
Assets
=
Liabilities
Cash -$225
(c) Debit−Credit Analysis
Solutions Manual .
+
Shareholders’ Equity Advertising Expense -$225
Debits increase expenses: debit Advertising Expense $225. Credits decrease assets: credit Cash $225.
3-29
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-4 (CONTINUED) (a), (b), and (c) (continued) Transaction 5
March 25: Received $1,000 cash from customers billed on March 10.
(a) Basic Analysis
The asset account Cash is increased by $1,000; the asset account Accounts Receivable is decreased by $1,000.
(b) Equation Analysis
Assets
=
Liabilities
+
Shareholders’ Equity
Cash +$1,000 Accounts Receivable -$1,000
(c) Debit−Credit Analysis
Debits increase assets: debit Cash $1,000. Credits decrease assets: credit Accounts Receivable $1,000.
Transaction 6
March 27: Paid amount owing for used car purchased on March 4.
(a) Basic Analysis
The liability account Accounts Payable is decreased by $9,000; the asset account Cash is decreased by $9,000.
(b) Equation Analysis
Assets
Cash -$9,000 (c) Debit−Credit Analysis
Solutions Manual .
=
Liabilities
+
Shareholders’ Equity
Accounts Payable -$9,000
Debits decrease liabilities: debit Accounts Payable $9,000. Credits decrease assets: credit Cash $9,000.
3-30
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-4 (CONTINUED) (a), (b), and (c) (continued) Transaction 7
March 30: Received $700 cash from a customer for services to be performed in April.
(a) Basic Analysis
The asset account Cash is increased by $700; the liability account Unearned Revenue is increased by $700.
(b) Equation Analysis
Assets
=
Liabilities
+
Shareholders’ Equity
Unearned Revenue +$700
Cash +$700 (c) Debit−Credit Analysis
Debits increase assets: debit Cash $700. Credits increase liabilities: credit Unearned Revenue $700.
Transaction 8
March 31: Declared and paid $300 of dividends to shareholders.
(a) Basic Analysis
The asset account Cash is decreased by $300; the Dividends Declared account is increased by $300.
(b) Equation Analysis
Assets
=
Liabilities
Cash -$300 (c) Debit−Credit Analysis
+
Shareholders’ Equity Dividends Declared -$300
Debits increase dividends: debit Dividends Declared $300. Credits decrease assets: credit Cash $300.
LO 1,2 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-31
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-5 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Equipment ............................... Accounts Payable...............
8,000
Rent Expense .......................... Cash .................................
1,600
Accounts Receivable ............... Service Revenue ..............
3,800
Utilities Expense ...................... Cash .................................
300
Cash ........................................ Bank Loan Payable ..........
20,000
Accounts Payable.................... Cash .................................
8,000
Prepaid Insurance ................... Cash .................................
500
Cash ........................................ Accounts Receivable........
3,000
Dividends Declared ................. Cash .................................
500
Income Tax Expense............... Cash .................................
250
8,000
1,600
3,800
300
20,000
8,000
500
3,000
500
250
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-32
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-6 Mar. 2
4
10
13
25
27
30
31
Cash ........................................ Common Shares.................
11,000
Vehicles ................................... Cash .................................. Accounts Payable .............
10,000
Accounts Receivable ............... Service Revenue ..............
2,300
Advertising Expense ................ Cash .................................
225
Cash ........................................ Accounts Receivable ........
1,000
Accounts Payable .................... Cash .................................
9,000
Cash ........................................ Unearned Revenue ..........
700
Dividends Declared ................. Cash .................................
300
11,000
1,000 9,000
2,300
225
1,000
9,000
700
300
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-33
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-7 Transaction 1
Sept. 1: Issued common shares for $20,000 cash.
(a) Basic Analysis
The asset account Cash is increased by $20,000; the shareholders’ equity account Common Shares is increased by $20,000.
(b) Equation Analysis
Assets
=
Liabilities
+
Cash +$20,000
Shareholders’ Equity Common Shares +$20,000
(c) Debit−Credit Analysis
Debits increase assets: debit Cash $20,000. Credits increase share capital (shareholders’ equity): credit Common Shares $20,000.
Transaction 2
Sept. 2: Performed $9,000 of services on account for a customer.
(a) Basic Analysis
The asset account Accounts Receivable is increased by $9,000; the revenue account Service Revenue is increased by $9,000.
(b) Equation Analysis
Assets
=
Liabilities
Accounts Receivable +$9,000 (c) Debit−Credit Analysis
Solutions Manual .
+
Shareholders’ Equity Service Revenue +$9,000
Debits increase assets; debit Accounts Receivable $9,000. Credits increase revenues; credit Service Revenue $9,000.
3-34
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-7 (CONTINUED) (a), (b), and (c) (continued) Transaction 3
Sept. 4: Purchased equipment for $12,000 paying $5,000 in cash and borrowing the balance from the bank.
(a) Basic Analysis
The asset account Equipment is increased by $12,000; the asset account Cash is decreased by $5,000 and the liability account Bank Loan Payable increased by $7,000.
(b) Equation Analysis
Assets
=
Liabilities
Shareholders’ Equity
+
Bank Loan Payable +$7,000
Cash -$5,000 Equipment +$12,000
(c) Debit−Credit Analysis
Debits increase assets: debit Equipment $12,000. Credits decrease assets: credit Cash $5,000 Credits increase liabilities: credit Bank Loan Payable $7,000.
Transaction 4
Sept. 10: Purchased $500 of supplies on account.
(a) Basic Analysis
The asset account Supplies is increased by $500; the liability account Accounts Payable is increased by $500.
(b) Equation Analysis
Assets
Supplies +$500
(c) Debit−Credit Analysis
Solutions Manual .
=
Liabilities
+
Shareholders’ Equity
Accounts Payable +$500
Debits increase assets: debit Supplies $500. Credits increase liabilities: credit Accounts Payable $500.
3-35
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-7 (CONTINUED) (a), (b), and (c) (continued) Transaction 5
Sept. 25: Received $4,500 cash in advance for architectural services to be provided next month.
(a) Basic Analysis
The asset account Cash is increased by $4,500; the liability account Unearned Revenue is increased by $4,500.
(b) Equation Analysis
Assets
=
Liabilities
+
Shareholders’ Equity
Unearned Revenue +$4,500
Cash +$4,500
(c) Debit−Credit Analysis
Debits increase assets: debit Cash $4,500. Credits increase liabilities: credit Unearned Revenue $4,500.
Transaction 6
Sept. 30: Paid $300 on account in partial payment of amount owing for supplies purchased Sept. 10.
(a) Basic Analysis
The liability account Accounts Payable is decreased by $300; the asset account Cash is decreased by $300.
(b) Equation Analysis
Assets
Cash -$300 (c) Debit−Credit Analysis
Solutions Manual .
=
Liabilities
+
Shareholders’ Equity
Accounts Payable -$300
Debits decrease liabilities: debit Accounts Payable $300. Credits decrease assets: credit Cash $300.
3-36
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-7 (CONTINUED) (a), (b), and (c) (continued) Transaction 7
Sept. 30: Collected $5,000 on account owing from customer from Sept. 2.
(a) Basic Analysis
The asset account Cash is increased by $5,000; the asset account Accounts Receivable is decreased by $5,000.
(b) Equation Analysis
Assets
=
Liabilities
+
Shareholders’ Equity
Cash +$5,000 Accounts Receivable -$5,000
(c) Debit−Credit Analysis
Debits increase assets: debit Cash $5,000. Credits decrease assets: credit Accounts Receivable $5,000.
(d)
Cash................................................... Common Shares .........................
20,000
Accounts Receivable.......................... Service Revenue.........................
9,000
Equipment .......................................... Cash ........................................... Bank Loan Payable .....................
12,000
Supplies ............................................. Accounts Payable .......................
500
Cash................................................... Unearned Revenue .....................
4,500
Accounts Payable .............................. Cash ...........................................
300
Cash................................................... Accounts Receivable ..................
5,000
Sept. 1
2
4
10
25
30
30
Solutions Manual .
3-37
20,000
9,000
5,000 7,000
500
4,500
300
5,000 Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-7 (CONTINUED) (e) Sept. 1 Sept. 25 Sept. 30 Bal.
Cash 20,000 Sept. 4 4,500 Sept. 30 5,000 24,200
Sept. 2 Bal.
Accounts Receivable 9,000 Sept. 30 4,000
Sept. 10
Supplies 500
Sept. 4
Equipment 12,000
Sept. 30
5,000 300
5,000
Accounts Payable 300 Sept. 10 Bal.
500 200
Unearned Revenue Sept. 25
4,500
Bank Loan Payable Sept. 4
7,000
Common Shares Sept. 1
20,000
Service Revenue Sept. 2
9,000
LO 1,2,3,4 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-38
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-8 Cash Mar.
Mar.
2
11,000 Mar.
4
1,000
25
1,000
13
225
30
700
27
9,000
31
300
25
1,000
31 Bal.
2,175 Accounts Receivable
Mar.
10
2,300 Mar.
Mar.
31 Bal.
1,300 Vehicles
Mar.
4
10,000 Accounts Payable
Mar.
27
9,000 Mar.
4
Mar. 31 Bal.
9,000 0
Unearned Revenue Mar. 30
700
Common Shares Mar. 2
11,000
Dividends Declared Mar. 31
300 Service Revenue Mar. 10
2,300
Advertising Expense Mar. 13
225
LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-39
Chapter 3
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
EXERCISE 3-9 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Operating activity Investing activity Operating activity Operating activity Operating activity Financing activity Operating activity Operating activity Operating activity Operating activity
LO 4 BT: AN Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual .
3-40
Chapter 3